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Capital Structure and Asset Prices: Some Effects of Bankruptcy Procedures

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  • Pascal Francois

    (HEC Montreal)

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    Abstract

    We examine the impact of the U.S. bankruptcy procedure on the valuation of corporate securities and capital structure decisions. We provide closed-form solutions for corporate debt and equity values when defaulting firms can either liquidate their assets or renegotiate outstanding debt under court protection. We show that the possibility to renegotiate the debt contract (i) has an ambiguous impact on leverage choices and (ii) increases credit spreads on corporate debt. The sharing rule of cash flows during bankruptcy has a large impact on optimal leverage. By contrast, credit spreads on corporate debt show little sensitivity to this very parameter.

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    File URL: http://www.journals.uchicago.edu/cgi-bin/resolve?JB770207
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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Business.

    Volume (Year): 77 (2004)
    Issue (Month): 2 (April)
    Pages: 387-412
    Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
    Handle: RePEc:ucp:jnlbus:v:77:y:2004:i:2:p:387-412

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    Cited by:
    1. Hackbarth, Dirk & Miao, Jianjun & Morellec, Erwan, 2006. "Capital structure, credit risk, and macroeconomic conditions," Journal of Financial Economics, Elsevier, vol. 82(3), pages 519-550, December.
    2. Haishi Huang, 2009. "Convertible Bonds: Risks and Optimal Strategies," Bonn Econ Discussion Papers bgse07_2010, University of Bonn, Germany.
    3. Ericsson, Jan & Jacobs, Kris & Oviedo, Rodolfo, 2009. "The Determinants of Credit Default Swap Premia," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(01), pages 109-132, February.
    4. Maclachlan, Iain C, 2007. "An empirical study of corporate bond pricing with unobserved capital structure dynamics," MPRA Paper 28416, University Library of Munich, Germany.
    5. Hong Liu & Jianjun Miao, 2006. "Managerial Preferences, Corporate Governance, and Financial Structure," Boston University - Department of Economics - Working Papers Series WP2006-020, Boston University - Department of Economics.
    6. Abel Elizalde, 2006. "Credit Risk Models Ii: Structural Models," Working Papers wp2006_0606, CEMFI.

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