Disclosure and Rollover Risk

This paper studies whether and to what extent transparent disclosure prevents inefficient liquidation arising from rollover risk. We model an illiquid but solvent borrower who can design a public signal about what creditors can recover from forcing liquidation, and what their claims would be worth if the firm survives. We find that the signal structure that minimizes rollover risk never identifies liquidation or continuation values, and that borrowers can commit to this structure. Moreover, if creditors can impose disclosure requirements, they may increase inefficient liquidation, in order to pool states to increase the amount they expect to recover from defaults.