DP2227 Restructuring as a Signal: A Simple Formalization

Author(s): Emilio Colombo
Publication Date: September 1999
Keyword(s): Restructuring, Signalling, Transitional Economy
JEL(s): C72, P31
Programme Areas: Transition Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2227

Several studies stressed that contrary to initial expectations, state-owned firms at the beginning of transition undertook painful measures to adjust to the new economic environment. This Paper investigates this behaviour in a simple game, a theoretic framework. It is argued that the massive amount of lay-offs created by state-owned firms during the initial phase of transition can be interpreted as a signal directed to the banking sector in order to obtain more favourable financing conditions for the subsequent process of restructuring. The conclusions are strongly supported by Polish firm level empirical evidence.