Document Type
Discussion Paper
Publication Date
11-1-2001
CFDP Number
1338
CFDP Pages
42
Abstract
There are situations in which dispersed creditors (e.g., public creditors) have more difficulties and higher costs when collecting their claims in financial distress than concentrated creditors (e.g., banks). Under this assumption, our model predicts that measures of debt concentration relate [a] positively to creditors’ chosen aggregate debt collection expenditures; [b] positively to management’s chosen expenditures to avoid paying; [c] positively to total net litigation costs/waste in financial distress; and [d] positively to accomplished claim recovery by creditors (to which we present some preliminary favorable empirical evidence). Under additional assumptions, measures of debt concentration relate [e] positively to intrinsic firm quality; [f] positively to creditor monitoring and negatively to managerial waste; [g] positively to optimal continuation/discontinuation choices; [h] negatively to issuing marketing expenses. In a signaling model, when concentration alone is not a sufficient signal, firms choose the ultimately concentrated debt (i.e., a house bank) and have to pay a high interest.
Recommended Citation
Welch, Ivo and Bris, Arturo, "The Optimal Concentration of Creditors" (2001). Cowles Foundation Discussion Papers. 1600.
https://elischolar.library.yale.edu/cowles-discussion-paper-series/1600