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The impact of debt restructuring on dynamic investment and financing policies

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  • Tan, Yingxian
  • Luo, Pengfei

Abstract

This paper explores the impacts of debt restructuring on investment and financing decisions and agency problem between shareholders and creditors. Notably, a critical feature in our model is that the renegotiation in debt restructuring is credible. To do so, we develop a unified model of dynamic investment, financing and agency problem for firms with renegotiable private debt, thereby highlight the significance of debt restructuring for corporate decisions. We find that firms with lower renegotiation costs and more uncertainty on cash flows are more likely to issue private debt than public debt. Interestingly, we also discover that debt restructuring can alleviate underinvestment and weaken sharesholders’ asset substitution motives, thereby reducing the agency costs of debt. The above results provide practical implications for policymakers about improving investment and financing efficiency and avoiding the deadweight loss of social welfare.

Suggested Citation

  • Tan, Yingxian & Luo, Pengfei, 2021. "The impact of debt restructuring on dynamic investment and financing policies," Economic Modelling, Elsevier, vol. 102(C).
    • Handle: RePEc:eee:ecmode:v:102:y:2021:i:c:s0264999321001723
    DOI: 10.1016/j.econmod.2021.105583
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    3. Jiang, Chun & Chang, Ya-Qi & Ge, Xinyu & Si, Deng-Kui, 2023. "Identifying the impact of bank competition on corporate shadow banking: Evidence from China," Economic Modelling, Elsevier, vol. 126(C).

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    More about this item

    Keywords

    Debt restructuring; Underinvestment; Asset substitution; Agency costs of debt;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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