Pricing the Gamble for Resurrection and the Consequences of Renegotiation and Debt Design
AbstractThis 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 InfoPaper provided by Toulouse - GREMAQ in its series Papers with number 97.480.
Length: 50 pages
Date of creation: 1997
Date of revision:
Contact details of provider:
Postal: GREMAQ, Universite de Toulouse I Place Anatole France 31042 - Toulouse CEDEX France.
Fax: 05 61 22 55 63
Web page: http://www-gremaq.univ-tlse1.fr/
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DEBT ; PRICING ; BONDS;
Find related papers by JEL classification:
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
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