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Repurchasing Debt

Author

Listed:
  • Lei Mao

    (Finance Group, Warwick Business School, University of Warwick, Coventry CV4 7AL, United Kingdom)

  • Yuri Tserlukevich

    (Department of Finance, Arizona State University, Tempe, Arizona 85287)

Abstract

In this paper we build a theoretical model of a firm repurchasing its corporate debt. We find that firm creditors as a group sell debt to the firm only at face value. However, because of the cross-creditor externalities, buying back debt is cheaper and easier when there are many creditors, e.g., when debt is traded on the open market. We further show that repurchases contribute to flexibility in firms' capital structure and can increase ex ante firm value. The value of repurchases to the shareholders increases with the firm's ability to save cash and delay the repurchase.Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2014.1965 . This paper was accepted by Brad Barber, finance.

Suggested Citation

  • Lei Mao & Yuri Tserlukevich, 2015. "Repurchasing Debt," Management Science, INFORMS, vol. 61(7), pages 1648-1662, July.
    • Handle: RePEc:inm:ormnsc:v:61:y:2015:i:7:p:1648-1662
    DOI: 10.1287/mnsc.2014.1965
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    References listed on IDEAS

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    Cited by:

    1. Thomas Dangl & Josef Zechner, 2021. "Debt Maturity and the Dynamics of Leverage [Rollover risk and market freezes]," The Review of Financial Studies, Society for Financial Studies, vol. 34(12), pages 5796-5840.

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