A Dynamic Model of Optimal Creditor Dispersion

87 Pages Posted: 17 Nov 2014 Last revised: 7 Jul 2020

See all articles by Hongda Zhong

Hongda Zhong

London School of Economics & Political Science (LSE) - Department of Finance

Date Written: May 12, 2020

Abstract

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

Zhong, Hongda, A Dynamic Model of Optimal Creditor Dispersion (May 12, 2020). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2525070 or http://dx.doi.org/10.2139/ssrn.2525070

Hongda Zhong (Contact Author)

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom

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