Coordination Risk and the Price of Debt

Stephen Morris and Hyun Song Shin

No 1241R, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: Creditors of a distressed borrower face a coordination problem. Even if the fundamentals are sound, fear of premature foreclosure by others may lead to pre-emptive action, undermining the project. Recognition of this problem lies behind corporate bankruptcy provisions across the world, and it has been identified as a culprit in international financial crises, but has received scant attention from the literature on debt pricing. Without common knowledge of fundamentals, the incidence of failure is uniquely determined provided that private information is precise enough. This affords a way to price the coordination failure. Comparative statics on the unique equilibrium provides several insights on the role of information and the incidence of inefficient liquidation.

Keywords: Common knowledge; debt pricing; credit risk; default (search for similar items in EconPapers)
Pages: 28 pages
Date: 1999-12, Revised 2002-02
New Economics Papers: this item is included in nep-fin
Note: CFP 1128.
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Citations: View citations in EconPapers (6)

Published in European Economic Review (2004), 48(1): 133-153

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Related works:
Journal Article: Coordination risk and the price of debt (2004)
Working Paper: Coordination risk and the price of debt (2001)
Working Paper: Coordination Risk and the Price of Debt (2001)
Working Paper: Coordination Risk and the Price of Debt (1999)
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