Dynamic debt runs

Zhiguo He, Wei Xiong

Research output: Contribution to journalReview articlepeer-review

98 Scopus citations

Abstract

This article analyzes the dynamic coordination problem among creditors of a firm with a time-varying fundamental and a staggered debt structure. In deciding whether to roll over his debt, each maturing creditor is concerned about the rollover decisions of other creditors whose debt matures during his next contract period. We derive a unique threshold equilibrium and characterize the roles of fundamental volatility, credit lines, and debt maturity in driving runs. In particular, we show that when fundamental volatility is sufficiently high, commonly used measures such as temporarily keeping the firm alive under runs and increasing debt maturity can exacerbate rather than mitigate runs.

Original languageEnglish (US)
Pages (from-to)1799-1843
Number of pages45
JournalReview of Financial Studies
Volume25
Issue number6
DOIs
StatePublished - Jun 1 2012

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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