A dynamic model of optimal creditor dispersion
|Date||11 November 2015|
|Venue||ICMA Centre, Room G03/04|
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.