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Co-ordination failure and the role of banks in the resolution of financial distress

Pagratis, Spyros (2004) Co-ordination failure and the role of banks in the resolution of financial distress. Discussion paper, 420. Financial Markets Group, London School of Economics and Political Science, London, UK.

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Abstract

This article discusses the out-of-court restructuring of the contractual obligations of a financially distressed firm, under conditions of asymmetric information among the firm’s creditors and in situations where a creditor bank makes concessions conditional on other creditors’ actions. I show that a bank’s conditional commitment to support the financially distressed firm may inject a degree of strategic solidity among other creditors and reduce the deadweight costs of inefficient liquidation. However, should a bank’s concession be made conditional on a high tendering rate by other creditors, this may negate the positive information externality of bank’s action. Low minimum tendering rates, on the other hand, may lead to multiple equilibria in creditors’ strategies; but, all those equilibria are shown to be Pareto improving of the unique equilibrium when there is no bank in the game.

Item Type: Monograph (Discussion Paper)
Official URL: http://fmg.lse.ac.uk
Additional Information: © 2004 The Authors
Library of Congress subject classification: H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Collections > LSE Financial Markets Group (FMG) Working Papers
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 420
Date Deposited: 20 Aug 2009 12:48
URL: http://eprints.lse.ac.uk/24939/

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