Dynamic Coordination and Bankruptcy Regulations
55 Pages Posted: 10 Apr 2019 Last revised: 9 Mar 2021
Date Written: January 19, 2021
The "automatic stay'' and "avoidable preference'' (clawback of some pre-bankruptcy repayments), two key provisions in many countries’ bankruptcy codes, seek to avoid creditor runs on insolvent firms. However, by making it harder to exit distressed firms in or near bankruptcy, these provisions could motivate creditors to run ex-ante. We develop a theoretical framework based on “clock game” and derive the optimal design of these regulations. We show that inside creditors should face a longer clawback window. Furthermore, firms can survive longer by committing to filing for bankruptcy earlier because the extra payoff in bankruptcy mitigates creditors’ incentive to run.
Keywords: Avoidable Preference, Suspension of Redemption, Clock Game, Bankruptcy Procedure, Runs
JEL Classification: D82, G33, G38
Suggested Citation: Suggested Citation