Information Aggregation and Multiplicity in Creditor Runs: The Role of Public Disclosure

Abstract

This paper studies the role of public disclosure in a coordination game, in which creditors trade a financial asset of the firm they finance, before deciding whether to rollover lending to the firm. Creditors base their trading and lending decisions on three sources of information: private information, public disclosure, and asset prices. We show that public disclosure plays a critical role in equilibrium outcome of corporate default, through its interaction with private information. Specifically, when public disclosure is sufficiently noisy, unique equilibrium only obtains for intermediate values of the precision of private information; when public disclosure is sufficiently precise, multiple equilibria always emerge. The impact of public disclosure on ex ante run probability and creditor welfare is conditioned on the precision of private information, and (when multiple equilibria exist) which equilibrium is played. We also show that the results hold for at least two categories of financial assets, equity shares and credit derivatives.