Dynamic Coordination and Bankruptcy Regulations

55 Pages Posted: 10 Apr 2019 Last revised: 9 Mar 2021

See all articles by Hongda Zhong

Hongda Zhong

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

Zhen Zhou

Tsinghua University - PBC School of Finance

Date Written: January 19, 2021

Abstract

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

Zhong, Hongda and Zhou, Zhen, Dynamic Coordination and Bankruptcy Regulations (January 19, 2021). PBCSF-NIFR Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=3355429 or http://dx.doi.org/10.2139/ssrn.3355429

Hongda Zhong

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

United Kingdom

Zhen Zhou (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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