Creditor Coordination, Liquidation Timing, and Debt Valuation

Abstract

This paper derives closed-form solutions for values of debt and equity in a continuous-time structural model in which the demands of creditors to be repaid cause a firm to be put into bankruptcy. This allows discussing the effect of creditor coordination in recovering money on the values of debt, equity, and the firm, as well as on optimal capital structure. The effects of features of bankruptcy codes that prevent co-ordination failures between creditors, such as automatic stays and preference law, are also considered. The model suggests that such features, while preventing co-ordination failures, can decrease welfare.

Keywords: asset pricing, real options, bankruptcy, liquidation, coordination failure, global games, capital structure

JEL Classification: G32, G33, G13, G72