Heterogeneous beliefs and the choice between private restructuring and formal bankruptcy

Pascal François, Alon Raviv

Research output: Contribution to journalArticlepeer-review

5 Scopus citations


We present a theory for the puzzling issue regarding why certain firms in financial distress, prefer a costlier formal bankruptcy procedure over direct renegotiations. We show that claimholders’ heterogeneous beliefs about the results of a formal plan and about judicial discretion may lead to such a preference. The proposed model predicts which resolution would be chosen under claimholders’ beliefs about the determinants driving the outcome of a formal procedure, such as the extent to which firm value is affected by bankruptcy, the likelihood of deviation from the absolute priority rule, and the probability of the court adopting a reorganization plan.

Original languageEnglish
Pages (from-to)156-167
Number of pages12
JournalNorth American Journal of Economics and Finance
StatePublished - Jul 2017

Bibliographical note

Publisher Copyright:
© 2017 Elsevier Inc.


  • Bankruptcy
  • Formal procedure
  • Heterogeneous beliefs
  • Informal process
  • Judicial discretion
  • Liquidation


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