How does soft information on the causes of default affect debt renegotiation? The Italian evidence

The paper investigates the complementary role of hard and soft information in affecting the bankruptcy outcome of in-court procedures. Previous literature mostly focuses on hard information as driver of the bankruptcy outcome. In a bankruptcy context, we identify the causes of default as a key piece of soft information which can emerge through a textual analysis of the legal papers written by the insolvency practitioners. We posit that soft information complements hard information in guiding creditors' choice of the bankruptcy outcome. To test our hypotheses, we construct a unique dataset composed of hard and soft information of Italian Small and Medium Enterprises that faced in-court debt renegotiation between 2011 and 2016. We show that the role of hard information in guiding creditors' decisions depends on the specific cause of default they interact with and we conclude that the two sets of information jointly shape the conditions for the bankruptcy outcome.