Email: N dot Koreli at warwick dot ac dot uk
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- Informational Economics
- Corporate Finance
Optimal strategic default and Investments and the resolution of financial distress (joint with Giulio Trigilia) (Job Market Paper)
In recent years, the U.S. experienced an increase in the share of default events that are resolved out-of-court, as well as a reduction in bankruptcy-related costs.This trend raises the question as to what drives the frequency with which defaults turn into bankruptcies. We propose a theory based on three pillars: first, bankruptcy is costlier than out-of-court restructuring; second, creditors cannot commit to take defaulting borrowers to court; third, firms have private information about the value of their assets, outside investors learn them only upon bankruptcy. Creditor’s bargaining power upon default decreases with bankruptcy costs and it increases with the frequency of strategic default – that is, default by firms which could have honored their obligations. When bankruptcy costs decrease,creditors obtain higher recovery rates out-of-court and therefore firms have lower incentives to default strategically. As a result, bankruptcy can occur less frequently.
Mediation in Competition
I examine how a market mediator can help disseminate financial information among market players. I introduce a mediator whose function is collecting financial information from the players and sharing this information with other market players. The crucial assumption is that information disclosure to the mediator by the participants is voluntary, so there is no third party who forces the market players to disclose private information. Given that the mediator has power to commit to the reporting policies to the bidders, the paper finds the information reporting policy that the mediator should adopt to minimize the probability of investment in unprofitable projects by an uninformed players. I show that the manipulation of first order beliefs of an uninformed player is not sufficient to extract information from an informed player. The main insight of the paper suggests that allowing a player who shares information to know the degree to which his information will be shared with other participants incentivises information disclosure.