A Dynamic Model of Optimal Creditor Dispersion
87 Pages Posted: 17 Nov 2014 Last revised: 7 Jul 2020
Date Written: May 12, 2020
Borrowing from multiple creditors exposes firms to rollover risks due to coordination problems among creditors, but it also improves firms' repayment incentives, thereby increasing pledgeability. Based on this trade-off, I develop a dynamic debt rollover model to analyze the evolution of creditor dispersion. Consistent with empirical evidence, I find that firms optimally increase creditor dispersion after poor performance. In contrast, cross-sectionally higher-growth firms can support more dispersed creditors. Frequent debt renegotiation paralyzes firms' ability to increase pledgeability by having more creditors. Finally, holding a cash balance while borrowing from multiple creditors improves firms' repayment incentives uniformly across all future states.
Keywords: Creditor Dispersion, Coordination Problem, Debt Rollover, Limited Commitment, Renegotiation
JEL Classification: D21, G32, G33
Suggested Citation: Suggested Citation