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The Optimal Concentration of Creditors

The Optimal Concentration of Creditors

Authors :
Ivo Welch
Arturo Bris
Source :
The Journal of Finance. 60:2193-2212
Publication Year :
2005
Publisher :
Wiley, 2005.

Abstract

Our model assumes that creditors need to expend resources to collect on claims. Consequently, because diffuse creditors suffer from mutual free-riding (Holmstrom (1982)), they fare worse than concentrated creditors (e.g., a house bank). The model predicts that measures of debt concentration relate positively to creditors’ (aggregate) debt collection expenditures and positively to management’s chosen expenditures to resist paying. However, collection activity is purely redistributive, so social waste is larger when creditors are concentrated. If borrower quality is not known, the best firms choose the most concentrated creditors and pay higher expected yields. COORDINATION FAILURE AMONG MULTIPLE CLAIMANTS ,b ethey creditors or owners, is a subject well studied in the academic literature. Such coordination failure can lead to takeover failures (Grossman and Hart (1980)) or bank-runs (e.g., Diamond and Dybvig (1983), Morris and Shin (1999)), or can generally reduce the probability of successful renegotiation to a proposed reorganization plan when renegotiation requires simultaneous assent by many claimants (e.g., �

Details

ISSN :
00221082
Volume :
60
Database :
OpenAIRE
Journal :
The Journal of Finance
Accession number :
edsair.doi.dedup.....daca113e0383362ee3c5cd8390c66cb2
Full Text :
https://doi.org/10.1111/j.1540-6261.2005.00796.x