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Debt Valuation and Chapter 22

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  • Adriana Breccia

    (Department of Economics, Mathematics & Statistics, Birkbeck)

  • William Perraudin

    (Imperial College London)

Abstract

Numerous studies have examined the effect on credit spreads of renegotiation. These studies have generally focused on the impact on spread levels in general, and not on how renegotiation influences the relative pricing of senior versus junior debt claims. In this paper, we show that the scope for sequential renegotiation may reduce and even eliminate the premium for debt seniority. Our analysis also explains why companies may engage in repeated Chapter 11 bankruptcy filings (a phenomenon commonly referred to as Chapter 22).

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File URL: http://www.ems.bbk.ac.uk/research/wp/2010/PDFs/BWPEF1015.pdf
File Function: First version, 2010
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Bibliographic Info

Paper provided by Birkbeck, Department of Economics, Mathematics & Statistics in its series Birkbeck Working Papers in Economics and Finance with number 1015.

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Date of creation: Nov 2010
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Handle: RePEc:bbk:bbkefp:1015

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  1. Sergei A. Davydenko & Ilya A. Strebulaev, 2007. "Strategic Actions and Credit Spreads: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 62(6), pages 2633-2671, December.
  2. Fries, Steven & Miller, Marcus & Perraudin, William, 1997. "Debt in Industry Equilibrium," Review of Financial Studies, Society for Financial Studies, vol. 10(1), pages 39-67.
  3. HEGE, Ulrich & MELLA-BARRAL, Pierre, 2002. "Repeated dilution of diffusely held debt," Les Cahiers de Recherche 751, HEC Paris.
  4. Aivazian, Varouj A. & Callen, Jeffrey L., 1983. "Reorganization in bankruptcy and the issue of strategic risk," Journal of Banking & Finance, Elsevier, vol. 7(1), pages 119-133, March.
  5. Mark Broadie & Mikhail Chernov & Suresh Sundaresan, 2007. "Optimal Debt and Equity Values in the Presence of Chapter 7 and Chapter 11," Journal of Finance, American Finance Association, vol. 62(3), pages 1341-1377, 06.
  6. Pierre Mella-Barral & William R M Perraudin, 1993. "Strategic Debt Service," CEPR Financial Markets Paper 0039, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ.
  7. Dirk Hackbarth & Christopher A. Hennessy & Hayne E. Leland, 2007. "Can the Trade-off Theory Explain Debt Structure?," Review of Financial Studies, Society for Financial Studies, vol. 20(5), pages 1389-1428, 2007 04.
  8. Mella-Barral, Pierre, 1999. "The Dynamics of Default and Debt Reorganization," Review of Financial Studies, Society for Financial Studies, vol. 12(3), pages 535-78.
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