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Debt Valuation, Renegotiations, and Optimal Dividend Policy

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  • Fan, H.
  • Sundaresan, S.
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    Abstract

    The valuation of debt and equity, reorganization boundaries and firm's The valuation of debt and equity, reorganization boundaries and firm's optimal dividend policies are studied in a framework where we model strategic interactions between debtholders and equityholders in a game-theoretic setting which can accommodate varying bargaining powers to the two claimants. Two formulations of reorganization are presented: debt-equity swaps and strategic debt service resulting from negotiated debt service reductions. Bond covenants lead to more conservative dividend policies which benefit both claimants via lowered expected cost of liquidation. We derive optimal equity issuance and dividend policies. The debt capacity of the firm and the optimal capital structure are characterized.

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    Bibliographic Info

    Paper provided by Columbia - Graduate School of Business in its series Papers with number 99-5.

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    Length: 51 pages
    Date of creation: 1999
    Date of revision:
    Handle: RePEc:fth:colubu:99-5

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    Postal: U.S.A.; COLUMBIA UNIVERSITY, GRADUATE SCHOOL OF BUSINESS, PAINE WEBBER , New York, NY 10027 U.S.A
    Phone: (212) 854-5553
    Web page: http://www.columbia.edu/cu/business/
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    Keywords: ENTERPRISES ; DEBT ; GAME THEORY ; CONTRACTS;

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