The Optimal Response to Default: Renegotiation or Extended Maturity?
This paper reinforces the argument of Harding and Sirmans (2002) that the observed preference of lenders for extended maturity rather than renegotiation of the principle in the case of loan default is due to the superior incentive properties of the former. Specifically, borrowers have a greater incentive to avoid default under extended maturity because it reduces the likelihood that they will be able to escape paying off the full loan balance. Thus, although extended maturity leaves open the possibility of foreclosure, it will be preferred to renegotiation as long as the dead weight loss from foreclosure is not too large.
|Date of creation:||May 2007|
|Date of revision:|
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- John P. Harding & C.F. Sirmans, 2002. "Renegotiation of Troubled Debt: The Choice between Discounted Payoff and Maturity Extension," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 30(3), pages 475-503.
- Paul Asquith & Robert Gertner & David Scharfstein, 1994. "Anatomy of Financial Distress: An Examination of Junk-Bond Issuers," The Quarterly Journal of Economics, Oxford University Press, vol. 109(3), pages 625-658.
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