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Secured and unsecured debt in creditor-friendly bankruptcy

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  • François, Pascal
  • Naqvi, Hassan

Abstract

This article develops a continuous-time asset pricing model for valuing corporate securities in the presence of both secured and unsecured debt. We consider a framework where creditors dominate the negotiation process. This is consistent with the increasing influence of creditors in bankruptcy. We show that the unsecured creditors are incentivized to liquidate the firm prematurely relative to the first-best threshold. However, if the firm’s liquidation value is very low, it should complement its secured debt with unsecured debt as a form of insurance to avoid early liquidations. Our results have important implications for the debt structure and the resolution of financial distress of modern firms with substantial intangible assets.

Suggested Citation

  • François, Pascal & Naqvi, Hassan, 2023. "Secured and unsecured debt in creditor-friendly bankruptcy," Journal of Corporate Finance, Elsevier, vol. 80(C).
    • Handle: RePEc:eee:corfin:v:80:y:2023:i:c:s0929119923000627
    DOI: 10.1016/j.jcorpfin.2023.102413
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    References listed on IDEAS

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    More about this item

    Keywords

    Bankruptcy; Intangible assets; Premature liquidation; Risky debt pricing; Secured debt; Strategic creditors; Unsecured debt;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • 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

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