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Pricing the Gamble for Resurrection and the Consequences of Renegotiation and Debt Design

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Author Info

  • Decamps, J.-P.
  • Faure-Grimaud, A.

Abstract

This paper aims at measuring the loss in the value of a firm due to the gamble for resurrection, in a standard contingent claims model. Just before a debt repayment is due, the equityholders of a levered firm can decide to shut the firm down or to keep it as an ongoing concern. We study how leverage affects the operating decision and we provide a closed form formula for the associated agency costs. We show that yield spreads associated with defaultable bonds are higher than those obtained when ignoring the agency conflict.

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Bibliographic Info

Paper provided by Toulouse - GREMAQ in its series Papers with number 97.480.

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Length: 50 pages
Date of creation: 1997
Date of revision:
Handle: RePEc:fth:gremaq:97.480

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Postal: GREMAQ, Universite de Toulouse I Place Anatole France 31042 - Toulouse CEDEX France.
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Fax: 05 61 22 55 63
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Web page: http://www-gremaq.univ-tlse1.fr/
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Related research

Keywords: DEBT ; PRICING ; BONDS;

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