Business Risk Targeting AndRescheduling of Distressed Debt

This article reconsiders the rescheduling of distressed debt and the period preceding thefinancial reorganization. We develop a contingent claim analysis where equity holders takeadvantage of their position ex ante the default. We reveal situations where the equity price is aconcave function of the firm's assets volatility. The optimal strategy consists in targeting aspecific business risk level. This in turn leads either to an upward risk shifting or to some riskavoidance before default; this does not necessary imply opportunity costs for creditors. Weappreciate the economic significance of these latter costs. Finally, we question the timing ofthe business risk adjustment and address the crossed influence of stake holders before and atthe reorganization. All these extensions yield essentially the same conclusions.