Optimal Capital Structure and Bankruptcy Choice: Dynamic Bargaining vs Liquidation

Samuel Antill and Steven Grenadier
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Samuel Antill: Stanford University
Steven Grenadier: Stanford University

Research Papers from Stanford University, Graduate School of Business

Abstract: We model a firm's optimal capital structure decision in a framework in which it may later choose to enter either Chapter 11 reorganization or Chapter 7 liquidation. Creditors anticipate equityholders' ex-post reorganization incentives and price them into the ex-ante credit spreads. Using a realistic dynamic bargaining model of reorganization, the implied capital structure results in both higher credit spreads and dramatically lower leverage than existing models. If reorganization is less efficient than liquidation, the added option of reorganization can actually make equityholders worse off ex-ante, even when they liquidate on the equilibrium path.

Date: 2017-09
New Economics Papers: this item is included in nep-ban, nep-gth and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:stabus:repec:ecl:stabus:3582

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