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Extending the Maturity of a Defaulting Debt — The Longstaff Model Revisited

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Author Info

  • 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)

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    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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    Bibliographic Info

    Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal Review of Pacific Basin Financial Markets and Policies.

    Volume (Year): 12 (2009)
    Issue (Month): 01 ()
    Pages: 125-140

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    Handle: RePEc:wsi:rpbfmp:v:12:y:2009:i:01:p:125-140

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    Related research

    Keywords: Defaulting debt; liquidation cost; maturity extension decisions; optimal extension period; Sharpe ratio; JEL Classification: GG13; JEL Classification: G33;

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