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A Theory of Capital Structure with Strategic Defaults and Priority Violations

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  • Hans K. Hvide
  • Tore Leite

Abstract

We reformulate the classic CSV model of financial contracting from Townsend (1979) and Gale & Hellwig (1985) to tackle criticisms raised against it voiced by Hart (1995), such as lack of optimal behavior at the repayment stage and an inability to allow for outside equity. As a result, we obtain a theory of capital structure that accommodates empirical regularities such as bankruptcies, strategic defaults of debt obligations, and violations of absolute priority rules as parts of the equilibrium description.

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File URL: http://128.118.178.162/eps/fin/papers/0311/0311003.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 0311003.

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Length: 40 pages
Date of creation: 05 Nov 2003
Date of revision:
Handle: RePEc:wpa:wuwpfi:0311003

Note: Type of Document - pdf; prepared on WinXP; pages: 40
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Web page: http://128.118.178.162

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Keywords: Cash Diversion; Costly State Verification; Outside Equity; Financial Contracts.;

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