Dynamic Coordination and Bankruptcy Regulations

51 Pages Posted: 10 Apr 2019 Last revised: 22 Jan 2024

See all articles by Hongda Zhong

Hongda Zhong

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics; Centre for Economic Policy Research (CEPR)

Zhen Zhou

Tsinghua University - PBC School of Finance

Date Written: January 21, 2024

Abstract

We build a dynamic model of creditor coordination and uncover a novel trade-off: regulations enhancing ex post recovery rates in bankruptcy by affecting more creditors can exacerbate the hazard rate, which in turn jeopardizes coordination. The interplay between the recovery and hazard rate channels influences creditors’ decisions to stay invested. Furthermore, firms’ commitment to filing for bankruptcy early, thereby preserving assets for latecomers in bankruptcy, can prolong survival. Intriguingly, regulators’ clawbacks on pre-bankruptcy repayments may outperform firms’ commitment to early bankruptcy filing in promoting coordination. Our analysis extends to implications for automatic stay, avoidable preference, banking regulations, and creditor seniority.

Keywords: Automatic Stay, Avoidable Preference, Banking Regulation, Clock Game, Runs

JEL Classification: D82, G33, G38

Suggested Citation

Zhong, Hongda and Zhou, Zhen, Dynamic Coordination and Bankruptcy Regulations (January 21, 2024). PBCSF-NIFR Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=3355429 or http://dx.doi.org/10.2139/ssrn.3355429

Hongda Zhong

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Zhen Zhou (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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