We present a continuous-time asset pricing model of the levered firm where shareholders select not only the timing but also the form of control transfers. Owners are allowed to walk out of the firm either by (I) defaulting on their debt obligations or (ii) selling the firm with its debt obligations, as in a corporation sale. The structural model relates shareholders ex-post choice to both technological and financial factors. We obtain that the likelihood of default being chosen instead of a corporation sale increases with (I) the degree of leverage displayed by the firm and (ii) its technological supremacy in the industry. Moreover, whereas default necessarily involves inefficient timing of ownership transfers, corporation sales eliminate agency costs and achieve the correct allocation of resources. By ignoring such direct sales of ownership rights, existing defaultable bond pricing models thus often exaggerate risk premia and under-estimate the borrowing ability (debt capacity) of firms.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Publisher Info
Paper provided by Financial Markets Group in its series FMG Discussion Papers with number
dp325.