Title: Refinancing and coordination among multiple creditors and a debtor firm

Authors: Fumiko Takeda, Koichi Takeda

Addresses: Department of Geosystem Engineering, University of Tokyo, 7-3-1, Hongo, Bunkyo-ku, Tokyo 113-8656, Japan. ' Faculty of Economics, Hosei University, 4342 Aihara-machi, Machida-shi, Tokyo 194-0298, Japan

Abstract: 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.

Keywords: refinancing; moral hazards; coordination failures; incomplete information; global game; large creditor; debtor firms; forbearance lending.

DOI: 10.1504/GBER.2005.007619

Global Business and Economics Review, 2005 Vol.7 No.2/3, pp.234 - 246

Published online: 20 Aug 2005 *

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