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The Valuation of Corporate Debt with Default Risk

Author

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  • Hassan Naqvi

    (NUS Business School, & Financial Markets Group, LSE)

Abstract

This article values equity and corporate debt by taking into account the fact that in practice the default point differs from the liquidation point and that it might be in the creditors' interest to delay liquidation. The article develops a continuous time asset pricing model of debt restructuring which explicitly considers the inalienability of human capital. The study finds that even though in general the creditors will not liquidate the firm on the incidence of default, but nevertheless would liquidate the firm prematurely relative to the first best threshold. This agency problem leads to the breakdown of the capital structure irrelevance result.

Suggested Citation

  • Hassan Naqvi, 2004. "The Valuation of Corporate Debt with Default Risk," Finance 0410010, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0410010
    Note: Type of Document - pdf; pages: 26
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    References listed on IDEAS

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    Cited by:

    1. Smith, Stephen D. & Wall, Larry D., 2010. "Debt, hedging and human capital," Journal of Financial Stability, Elsevier, vol. 6(2), pages 55-63, June.
    2. Abel Elizalde, 2007. "From Basel I to Basel II: An Analysis of the Three Pillars," Working Papers wp2007_0704, CEMFI.

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    More about this item

    Keywords

    Debt pricing; default risk; inalienability of human capital;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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