Strategic Debt Service
Abstract
When firms experience financial distress, equity holders may act strategically, forcing concessions from debtholders and paying less than the originally contracted interest payments. This article incorporates strategic debt service in a standard, continuous time asset pricing model, developing simple closed-form expressions for debt and equity values. The authors find that strategic debt service can account for a substantial proportion of the premium on risky corporate debt. They analyze the efficiency implications of strategic debt service, showing that it can eliminate both direct bankruptcy costs and agency costs of debt. Copyright 1997 by American Finance Association.Download Info
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Bibliographic Info
Article provided by American Finance Association in its journal Journal of Finance.
Volume (Year): 52 (1997)
Issue (Month): 2 (June)
Pages: 531-56
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Handle: RePEc:bla:jfinan:v:52:y:1997:i:2:p:531-56
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For corrections or technical questions regarding this item, or to correct its listing, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum).
Related research
Keywords:Other versions of this item:
- Pierre Mella-Barral & William R M Perraudin, 1993. "Strategic Debt Service," CEPR Financial Markets Paper 0039, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ.
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