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Does Performance-Sensitive Debt mitigate Debt Overhang?

Author

Listed:
  • Alain Bensoussan

    (UT Dallas - University of Texas at Dallas [Richardson], HKU - The University of Hong Kong)

  • Benoit Chevalier-Roignant

    (EM - EMLyon Business School)

  • Alejandro Rivera

    (UT Dallas - University of Texas at Dallas [Richardson], HKU - The University of Hong Kong)

Abstract

We model the expansion decision of a levered firm. Straight debt distorts both timing and scaling: the firm invests less and later than its all-equity financed counterpart. The inclusion of performance sensitivity in the debt contract mitigates such distortions. Moreover, performance sensitivity is consistent with firm value maximization within a standard trade-off theory of capital structure. As a result, our model rationalizes the widespread use of performance sensitive debt (PSD), especially amongst fast growth firms.

Suggested Citation

  • Alain Bensoussan & Benoit Chevalier-Roignant & Alejandro Rivera, 2021. "Does Performance-Sensitive Debt mitigate Debt Overhang?," Post-Print hal-03364891, HAL.
    • Handle: RePEc:hal:journl:hal-03364891
    DOI: 10.1016/j.jedc.2021.104203
    Note: View the original document on HAL open archive server: https://hal.science/hal-03364891
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    Cited by:

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    2. Alain Bensoussan & Benoît Chevalier‐Roignant & Alejandro Rivera, 2022. "A model for wind farm management with option interactions," Production and Operations Management, Production and Operations Management Society, vol. 31(7), pages 2853-2871, July.
    3. Yao, Yanming & Luo, Pengfei, 2022. "Cash management and risk-taking incentives with performance-sensitive debt under stochastic financing conditions," Finance Research Letters, Elsevier, vol. 49(C).

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    Keywords

    Debt Overhang; Performance-Sensitive Debt; Capital Structure; Real Options;
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