Dr. Alon Raviv
Graduate School of Business Administration
The Choice between Private Restructuring and Formal Bankruptcy under Heterogeneous Beliefs
We present a novel theory for the puzzling issue of why some firms in financial distress, that need to renegotiate their debt prefer the formal bankruptcy procedure, which is more costly, over a direct negotiation with their debtholders. Specifically, we show how heterogeneous beliefs of the different claimholders regarding the possible results of a formal plan, due to judicial discretion, may lead to this preference. In the model informal process takes place if the total value of all corporate claims in a formal procedure, according to each of its claimholders’ belief, is below the firm’s assets value in an informal process. In such case, all claimholders believe that they can be better off by using informal process due to a positive surplus that can be divided (Pareto Improving). The proposed model can signal which resolution would be chosen under any set of claimholders’ eliefs with respect to different features of a formal procedure, such as the size of bankruptcy costs, the deviation from the absolute priority rule in a reorganization plan and the probability of adopting a reorganization plan by the court.
Short Bio: Alon Raviv joined the BIU faculty in the Fall of 2012. Prior to the current position he was a faculty member at Brandeis International Business School (2009-2012) and at Boston University (2008-2009). Dr.Raviv has more than ten years of experience in the banking industry as a senior Quant at the Analytical Development unit of Bank Hapoalim,Israel, as an economist at the Bank of Israel, and as a consultant for Percipio Capital. He received both his Ph.D. and master degree in finance from the Hebrew University of Jerusalem. His fields of interest are derivatives, corporate finance, and the management of financial institutions. He has publications in conference, proceedings and journals including the Journal of Banking and Finance, Journal of Future Market, Journal of Financial Stability, the Israeli Economic Quarterly, and the Israeli Banking Review.