Dynamic Coordination and Bankruptcy Regulations

Hongda Zhong and Zhou Zhen

No 20331, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Many regulations aim at promoting coordination among creditors in bankruptcy by ex post restricting their ability to exit distressed firms. However, such restrictions may harm creditors’ ex ante incentives to stay invested, thereby worsening coordination outcomes. We build a dynamic coordination model to show how this force shapes creditor runs, bankruptcy filings, and regulation designs. Intriguingly, filing for bankruptcy early, thereby preserving more assets for latecomers, can prolong firm life. Furthermore, regulators' clawbacks on pre-bankruptcy repayments can be superior to firms' commitment to early bankruptcy filing. Our analysis generates implications for automatic stay, avoidable preference, bank failures, and seniority structure.

Keywords: Runs (search for similar items in EconPapers)
JEL-codes: D83 G33 G38 (search for similar items in EconPapers)
Date: 2025-06
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