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Part: V Mergers and Acquisitions, Bankru... > Bankruptcy and Dissolution of Compan...

Chapter 18. Bankruptcy and Dissolution of Companies

INTRODUCTION

In any area of economic activity, many companies are established which for various reasons will cease to exist. Some companies will close down due to a portfolio of products inferior to that of their competitors, some companies will be unable to recruit workers, and some will fail to convince their potential customers of the superiority of their products, even if such products are indeed superior to the ones offered by the competition. Other companies will close down due to unfortunate capital-raising timing. Even if their product suite is good, companies may be unable to secure financing due to a temporary or long-term crisis in the capital markets, as a result of which they will find themselves at a relative disadvantage compared to similar or inferior companies which raised capital in more favorable times. From an economic point of view, dissolution is an efficient market's screening mechanism for “disposing of” second-rate companies. However, since the capital market is not always efficient, the companies which survive are often no better than those that close down.


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