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Repeated Dilution of Diffusely Held Debt

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Author Info
Ulrich Hege (HEC School of Management Paris)
Pierre Mella-Barral (HEC School of Management Paris)

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Abstract

Debt with many creditors is analyzed in a continuous-time pricing model of the levered firm with opportunistic renegotiation offers and default threats. Dispersed creditors accept coupon concessions only in exchange for guaranteed liquidation rights, like collateral. In the ex ante optimal debt contract, this security is provided by assets that gradually become worthless as the firm approaches the preferred liquidation conditions. Dispersed debt offers larger debt capacity than single-creditor debt and is preferable if the ex ante value of collateralizable assets is sufficiently low. Our model explains credit risk premia in excess of those supported by a single creditor with opportunistic renegotiation.

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

Volume (Year): 78 (2005)
Issue (Month): 3 (May)
Pages: 737-786
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Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:3:p:737-786

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Adriana Breccia, 2006. "Sequential Restructuring of Debt Classes, Absolute Priority Violation and Spread Reversals Under Chapter 11," Discussion Papers 06/09, Department of Economics, University of York. [Downloadable!]
  2. Dirk Hackbarth & Junjian Miao & Erwan Morellec, 2005. "Capital Structure, Credit Risk, and Macroeconomic Conditions," Boston University - Department of Economics - Macroeconomics Working Papers Series WP2005-005, Boston University - Department of Economics. [Downloadable!]
    Other versions:
  3. Ernst-Ludwig VON THADDEN & Erik BERGLÖF & Gérard ROLAND, 2003. "Optimal Debt Design and the Role of Bankruptcy," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 03.13, Université de Lausanne, Faculté des HEC, DEEP. [Downloadable!]
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