Creditor Coordination with Social Learning and Endogenous Timing of Credit Decisions

Abstract

In case of multiple source lending even solvent firms may be forced into bankruptcy due to uncoordinated credit withdrawals of their lenders. This paper analyzes whether a debtor firm can thwart such inefficient liquidations by offering creditors the option to delay their foreclosure decision rather than obliging them to simultaneous actions as suggested by Morris and Shin (2004). With this option, lenders can endogenously determine the timing of their credit decisions, trading off the informational benefit from waiting against the associated cost of delay. Our results state that the option to delay diminishes creditor coordination failure whenever the firm is expected to be in distress.