This paper investigates the conditions under which a large creditor offers refinancing to a debtor firm and examines how that refinancing affects the decisions of the debtor firm and other creditors. We develop a model of a coordination game in which the actions of multiple creditors and the debtor firm are determined interdependently of each other. We find that refinancing can be beneficial for the large creditor only when the debtor firm faces a substantial, but not hopeless, risk of default. Whether the refinancing succeeds in preventing the default caused by the coordination failure, or gives rise to moral hazards of the debtor firm, depends on how poor the fundamentals of the debtor firm are. Another finding is that the size of the refinancing tends to be larger in cases where prior lending by a large creditor was greater, resulting in more serious debtor moral hazard.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
file. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.