Dynamic Coordination and Bankruptcy Regulations
51 Pages Posted: 10 Apr 2019 Last revised: 22 Jan 2024
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: Suggested Citation