Abstract A two‐period model in which communication restrictions preclude the usual revelation representation is analyzed, and the communication policies take on the appearance of “income smoothing.” The driving force is the information content of the “smoothed” or manipulated series, relative to its counterpart were manipulation not possible. Various possibilities arise, depending on the underlying stochastic structure: performance measure manipulation might be socially efficient, or not; and when it is best to invite and motivate this manipulation, the optimal policy itself can take on a variety of forms.

This paper provides empirical evidence that takeovers can facilitate the efficient redeployment of assets of bankrupt firms. Bidders for bankrupt firms are generally in related industries and often have some prior relationship to the target, suggesting they are well informed with respect to both the value and best use of the target's assets. For a sample of 55 acquisitions in Chapter 11, we find that firms merged with bankrupt targets show significant improvements in operating performance, while matching non-bankrupt transactions show no significant improvement. We also find positive and significant abnormal stock returns for the bidder and bankrupt target at the announcement of the acquisition.Journal of Economic LiteratureClassification Numbers: G33, G34.