Does Performance-Sensitive Debt mitigate Debt Overhang?
Alain Bensoussan,
Benoit Chevalier-Roignant (chevalier-roignant@em-lyon.com) and
Alejandro Rivera
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Alain Bensoussan: UT Dallas - University of Texas at Dallas [Richardson], HKU - The University of Hong Kong
Benoit Chevalier-Roignant: EM - EMLyon Business School
Alejandro Rivera: UT Dallas - University of Texas at Dallas [Richardson], HKU - The University of Hong Kong
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Abstract:
We model the expansion decision of a levered firm. Straight debt distorts both timing and scaling: the firm invests less and later than its all-equity financed counterpart. The inclusion of performance sensitivity in the debt contract mitigates such distortions. Moreover, performance sensitivity is consistent with firm value maximization within a standard trade-off theory of capital structure. As a result, our model rationalizes the widespread use of performance sensitive debt (PSD), especially amongst fast growth firms.
Keywords: Debt Overhang; Performance-Sensitive Debt; Capital Structure; Real Options (search for similar items in EconPapers)
Date: 2021-10-01
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-cta and nep-cwa
Note: View the original document on HAL open archive server: https://hal.science/hal-03364891v1
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Published in Journal of Economic Dynamics and Control, 2021, 131, ⟨10.1016/j.jedc.2021.104203⟩
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03364891
DOI: 10.1016/j.jedc.2021.104203
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