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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.

Suggested Citation

  • Hans K. Hvide & Tore Leite, 2003. "A Theory of Capital Structure with Strategic Defaults and Priority Violations," Finance 0311003, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0311003
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    More about this item

    Keywords

    Cash Diversion; Costly State Verification; Outside Equity; Financial Contracts.;
    All these keywords.

    JEL classification:

    • G - Financial Economics

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