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Pricing the Gamble for Resurrection and the Consequences of Renegotiation and Debt Design


  • Decamps, J.-P.
  • Faure-Grimaud, A.


This paper aims at measuring the loss in the value of a firm due to the gamble for resurrection, in a standard contingent claims model. Just before a debt repayment is due, the equityholders of a levered firm can decide to shut the firm down or to keep it as an ongoing concern. We study how leverage affects the operating decision and we provide a closed form formula for the associated agency costs. We show that yield spreads associated with defaultable bonds are higher than those obtained when ignoring the agency conflict.

Suggested Citation

  • Decamps, J.-P. & Faure-Grimaud, A., 1997. "Pricing the Gamble for Resurrection and the Consequences of Renegotiation and Debt Design," Papers 97.480, Toulouse - GREMAQ.
  • Handle: RePEc:fth:gremaq:97.480

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    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General


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