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Dynamic Debt Runs

  • Zhiguo He
  • Wei Xiong

We develop a dynamic model of debt runs on a firm, which invests in an illiquid asset by rolling over staggered short-term debt contracts. We derive a unique threshold equilibrium, in which creditors coordinate their asynchronous rollover decisions based on the firm's publicly observable and time-varying fundamental. Fear of the firm's future rollover risk motivates each maturing creditor to run ahead of others even when the firm is still solvent. Our model provides implications on the roles played by volatility, illiquidity and debt maturity in driving debt runs, as well as on firms' capital adequacy standards and credit risk.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15482.

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Date of creation: Nov 2009
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Publication status: published as Dynamic Debt Runs, with Wei Xiong, 2012, Review of Financial Studies 25, pp. 1799-1843.
Handle: RePEc:nbr:nberwo:15482
Note: AP CF ME
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