Dynamic Coordination and Bankruptcy Regulations

Hongda Zhong, Zhen Zhou - Jan 18, 2025

Working Paper No.  00147-00

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.


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