You are here


Three essays on asymmetric information and corporate defaults

Nan Chen, 2004
Faculty Advisor: Suresh Sundaresan


This dissertation consists of three essays on the effects of asymmetric information on firm's financial distress resolution choices, debt pricing and liquidation/reorganization decisions in bankruptcy.

The first essay studies the valuation of risky corporate debt, the firm's financing decisions and firm strategy during financial distress under asymmetric information. Using Chapter 11 as a costly state verification mechanism in a simple continuous-time setting, we characterize which firms will choose to file for the Chapter 11 Bankruptcy procedure and which will choose private workouts (in the form of strategic debt service) when the firm is in financial distress. We also provide a closed-form solution to the debt pricing problem under asymmetric information. In particular, we incorporate the learning effect into pricing by providing a clear picture of how the market's beliefs about the firm's quality evolve through the observation of the firm's debt servicing pattern. The pricing formula reduces to the well-known results of Merton, Black and Cox, Leland and others if private information can be costlessly revealed.

The second essay empirically examines information and several other factors that affect distressed firms' choice between Chapter 11 and workouts. We provide evidence that the ability of a distressed firm to restructure its debt out of bankruptcy depends on the degree of the firm's financial structure, the extent of creditor and other claimholders' coordination, the tangibility of the firm's assets, the magnitude of the firm's economic distress and severity of information, in particular, accounting problems.

In the third essay, we study the decision making problem of a value maximizing bankruptcy judge who is vested with the responsibility of deciding the future course of action concerning a corporate borrower who has entered into Chapter 11. The bankruptcy judge has less information than the borrower about the future prospects of the firm in distress and must draw costly inferences about the quality of management of the firm and update her beliefs based on noisy observations about the management. We characterize the optimal decision of the judge in terms of two boundaries: if the updated beliefs reach an upper threshold level of quality, the judge decides to reorganize the firm. On the other hand, if the updated beliefs reach a lower threshold level of quality, the judge decides to liquidate the firm. When the beliefs are strictly within these two endogenously determined triggers, the judge decides to collect more information. These boundaries are rationally anticipated by the lender and the borrower in making their choice about recontracting their loan obligations ex-ante. The model is then used to relate the probability of successful reorganization, and liquidation to the primitives: time, costs of financial distress, liquidation value and the value conditional on reorganization. We also explore how the decisions made by the lender (under receivership, for example) once the firm enters Chapter 11 might differ from the ones made by the bankruptcy judge.

Application Deadlines

Master of Science in Marketing >

For Fall 2016 Entry:

Available: August 1st, 2015
Deadline: January 4th, 2016


Master of Science in Financial Economics >

For Fall 2016 Entry:

Available: August 1st, 2015
Deadline: January 4th, 2016


Master of Science in Management Science and Engineering >

For Fall 2016 Entry:
To be determined


Available 8/1/15
Sept 2016

Deadline: 01/05/16

MS Marketing
Deadline: 01/04/16

MS Financial Economics
Deadline: 01/04/16


Doctoral Program News

Young Alumni Balseiro wins George B. Dantzig Dissertation Award

At the 2014 Informs national meeting, Santiago Balseiro was honored for his work in "Competition and Yield Optimization in Ad Exchanges". We congratulate Santiago on his accomplishment.

Read More Here

Ethan Rouen wins Deloitte Doctoral Fellowship in Accounting

The Deloitte Foundation has awarded $25,000 grants to 10 top accounting Ph.D. candidates through the Deloitte Foundation’s annual Doctoral Fellowship program. Given to students who plan to pursue academic careers upon graduation, the award will support the 2015 recipients’ final year of coursework and the subsequent year to complete their doctoral dissertation.

Read More Here

Honigsberg featured in Ideas at Work

The August issue of Ideas at Work features research that doctoral candidate Colleen Honigsberg led in conjunction with Sharon Katz.

Read More about Colleen

Wazlawek featured in Ideas at Work

Abbie Wazlawek's joint research with Professor Daniel Ames is featured in the June 24th, 2014 edition of Ideas at Work

Read More about Abbie

Ethan Rouen featured in Ideas at Work

Ethan Rouen's joint research with Professor Dan Amiram is featured in the May 15th, 2014 edition of Ideas at Work

Read More about Abbie

Rivas Wins Fellowship

The PhD program is proud to congratulate Miguel Duro Rivas, who was awarded the Nasdaq Educational Foundation Doctoral Dissertation Fellowship.

Read More about Miguel

Wong wins Deloitte Fellowship

We are proud to announce that Yu Ting (Forester) Wong is one of the recipients of the 2014 Deloitte Foundation Doctoral Fellowship in Accounting.

Read More About Yu Ting >

The PhD Program Congratulates John Yao

PhD student John Yao was a finalist in the 2013 M&SOM (Manufacturing & Service Operations Management) student paper competition.

Read More About John >

Honigsberg Named Postdoctoral Fellow

The PhD program is proud to congratulate Colleen Honigsberg, who was named the Postdoctoral Fellow in Corporate Governance at the Millstein Center at Columbia Law School in October 2013

Read More about Colleen >


Check Application Status

Students listening to classroom lecture

Once you've submitted your application, you can login and track your status by using the link below.

Check Status