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Optimal default and liquidation with tangible assets and debt renegotiation

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  • Goto, Makoto
  • Suzuki, Teruyoshi

Abstract

We propose a pricing model for corporate securities issued by a levered firm with the possibility of debt renegotiation, where the firm’s earnings follow a geometric Brownian motion with stochastic collaterals. While equity holders can default the firm when the earnings become insufficient, they may liquidate it by repaying the face value of debt when the value of collaterals becomes sufficiently high. Unlike the existing models, the bivariate structure enables us to distinguish strategic default, liquidity default and ordinary liquidation, which makes the contribution of strategic debt service to credit spreads lower than that obtained in the previous models.

Suggested Citation

  • Goto, Makoto & Suzuki, Teruyoshi, 2015. "Optimal default and liquidation with tangible assets and debt renegotiation," Review of Financial Economics, Elsevier, vol. 27(C), pages 16-27.
    • Handle: RePEc:eee:revfin:v:27:y:2015:i:c:p:16-27
    DOI: 10.1016/j.rfe.2015.07.001
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    More about this item

    Keywords

    Finance; Debt renegotiation; Strategic debt service; Credit spread;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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