Shyan Yuan Lee () (Department of Finance, National Taiwan University, No. 1, Sec. 4, Roosevelt Road, Da-an District, Taipei City 106, Taiwan) Yi Fang Chung () (Department of Finance, National Taiwan University, Taiwan; Department of Finance, De Lin Institute of Technology, 4F., No.4, Alley 2, Lane 266, Sihwei Rd., Banciao City, Taipei County 220, Taiwan)
Abstract
This paper uses differing objective functions under the Longstaff model (1990) to discuss the strategic choices faced by the creditor when deciding whether to grant maturity extension on a defaulted loan. The results reveal that: (1) it ensures that the return per unit of risk is higher after maturity extension than before; (2) it recognizes that the risk profile of the firm substantially affects the strategic behavior of the creditor; and (3) it demonstrates that the higher the profit sharing percentage the creditor get, the more willing it will be to extend maturity.
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