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Write-down bonds, credit risk and imperfect information

Author

Listed:
  • Zhao, Zhiming
  • Li, Shasha
  • Tang, Huiling

Abstract

A structural model of pricing Write-Down (hereafter WD) bonds under imperfect information has been developed to investigate the effect of WD bonds issuance on credit risk. Information is not only delayed but also asymmetrically distributed between managers and outside investors. We derive analytical solutions for corporate securities prices and find the issuance of WD bonds could significantly improve firm value via reducing bankruptcy cost. Our numerical results further demonstrate that the WD bonds issuance increases corporate risk tolerance and reduces the risk of bankruptcy and credit spreads under imperfect information.

Suggested Citation

  • Zhao, Zhiming & Li, Shasha & Tang, Huiling, 2021. "Write-down bonds, credit risk and imperfect information," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    • Handle: RePEc:eee:ecofin:v:57:y:2021:i:c:s1062940821000176
    DOI: 10.1016/j.najef.2021.101378
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    References listed on IDEAS

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    More about this item

    Keywords

    Asymmetric information; Credit risk; Write-down bonds;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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