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Financial distress, refinancing, and debt structure

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  • Dudley, Evan
  • Yin, Qie Ellie

Abstract

We examine changes in debt structure when firms experience financial distress. At these points in time, firms refinance and undergo substantial changes in priority structure. Specifically, we find that firms diversify their priority structure relative to its pre-distress composition. We show, using a simple model, that these changes are the firm's optimal response to its joint liquidity and investment needs. Additional predictions on the yield spreads of bonds issued to meet the firm's liquidity needs are also supported by the data.

Suggested Citation

  • Dudley, Evan & Yin, Qie Ellie, 2018. "Financial distress, refinancing, and debt structure," Journal of Banking & Finance, Elsevier, vol. 94(C), pages 185-207.
  • Handle: RePEc:eee:jbfina:v:94:y:2018:i:c:p:185-207
    DOI: 10.1016/j.jbankfin.2018.07.004
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    Cited by:

    1. Chen, Haosi & Maslar, David A. & Serfling, Matthew, 2020. "Asset redeployability and the choice between bank debt and public debt," Journal of Corporate Finance, Elsevier, vol. 64(C).

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    More about this item

    Keywords

    Capital structure; Debt structure; Credit downgrade; Priority spreading; Priority structure; Liquidity shock;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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