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Relying on the Information of Others: Debt Rescheduling with Multiple Lenders

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Author Info
Claude Fluet
Paolo G. Garella

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Abstract

Can inertia in terminating unsuccessful loans be due to the multiplicity of lenders in loan arrangements? Can a lender reschedule, betting against his odds? We show that fear of being last in a liquidation run prevents the aggregation of the lenders' information about the value of continuation. Private information in the form of bad but coarse news, that would prompt foreclosure on its own, will instead lead to rescheduling. The gamble is that other lenders may have sharper information. At equilibrium, rescheduling occurs even if all lenders received bad news. This is inefficient (increasing the cost of capital) compared to perfect information sharing. However, from a social point of view, barren information sharing, the equilibrium does not exhibit excessive reliance on the information of others.

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Paper provided by CIRPEE in its series Cahiers de recherche with number 0716.

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Date of creation: 2007
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Handle: RePEc:lvl:lacicr:0716

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Related research
Keywords: Debt contracts; asymmetric information; rescheduling; bankruptcy; Bayesian games;

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Find related papers by JEL classification:
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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