A dynamic model of optimal creditor dispersion

Hongda Zhong, London School of Economics
Event information
Date 11th November 2015
Time 1:00pm - 2:00pm
Venue ICMA Centre, Room G03/04
Event types:
Research Seminars

Borrowing from multiple creditors exposes firms to liquidation risks due to coordination problems among creditors, but it also improves the firms’ repayment incentives, thereby increasing pledgeability. Based on this trade-off, I develop a dynamic debt rollover model to analyse the evolution of creditor dispersion. Consistent with empirical findings, firms optimally increase the number of creditors when they perform badly, while in the cross-section, high growth firms can support more dispersed debt. Policies that promote ex-post efficient coordination lower firms’ ex-ante pledgeability and therefore exacerbate rollover risk. Finally, frequent debt rollover diminishes the additional pledgeability from having multiple creditors.

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