Dynamic Runs and Optimal Termination

Termination procedures shape creditors' payoffs both in and before bankruptcy, and in turn have implications on their willingness to stay invested (or exit) while the firm is still far away from distress. We build a dynamic coordination model and study three frequently cited termination procedures (regulations): ``automatic stay'', ``suspension of redemption'', and ``avoidable preference''. One can alter parameters in these policies to increase the payoffs that creditors receive in bankruptcy, making it more attractive for them to stay invested. However, these same policies simultaneously make it more difficult for creditors to exit the firm before bankruptcy with a full repayment, which exacerbates their incentive to run ex-ante. Based on this tradeoff, we analytically solve for the optimal design of the aforementioned policies and show how they are affected by imperfect enforcement