Valuation of the Firm's Liabilities When Equity Holders Are Also Creditors
AbstractThis paper presents a tractable structural model whereby controlling equity holders are also among the creditors of the firm. As the firm approaches distress, equity holders can drain the assets of the firm and expropriate other creditors by repaying their credit before bankruptcy. The right of the bankruptcy court to revoke such repayment protects arm's length creditors, reduces the cost of borrowing and induces equity holders to anticipate repayment of their credit. Equity holders decide repayment neither too early nor too late, so as to reduce the risk of repayment revocation by the bankruptcy court. Similar conclusions apply to the preferential repayment of bank loans personally guaranteed by equity holders. The analysis also suggests that callable bearer bonds may be more valuable to equity holders than to other creditors. Copyright 2007 The Authors Journal compilation (c) 2007 Blackwell Publishing Ltd.
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Bibliographic InfoArticle provided by Wiley Blackwell in its journal Journal of Business Finance & Accounting.
Volume (Year): 34 (2007-06)
Issue (Month): 5-6 ()
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0306-686X
Other versions of this item:
- Marco Realdon, 2006. "Valuation of the Firm's Liabilities when Equity Holders are also Creditors," Discussion Papers 06/16, Department of Economics, University of York.
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
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