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Excessive risk taking and the maturity structure of debt

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  • Djembissi, Bertrand
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    Abstract

    This paper analyses the effect of short term debt on equityholders' risk taking decisions. We show that if short term debt limits the expropriation of debtholders, it also implies a lower leverage, which prevents the firm from increasing tax shields. We then examine the incentive of equityholders to increase the firm risk when debtholders hold the option to swap a perpetual coupon bond with short term debt. We find that this option mitigates equityholders' risk shifting incentives. Compared to standard short term debt, this restructuring option deters debtholders expropriation, it increases leverage and it reduces the loss in tax shields due to asset substitution.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

    Volume (Year): 35 (2011)
    Issue (Month): 10 (October)
    Pages: 1800-1816

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    Handle: RePEc:eee:dyncon:v:35:y:2011:i:10:p:1800-1816

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    Web page: http://www.elsevier.com/locate/jedc

    Related research

    Keywords: Asset substitution Restructuring Debt maturity Agency costs;

    References

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