Asset sale, debt restructuring, and liquidation

Michi Nishihara () and Takashi Shibata ()
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Michi Nishihara: Graduate School of Economics, Osaka University Swiss Finance Institute, École polytechnique fédérale de Lausanne

No 15-22, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: This paper considers a dynamic model in which shareholders of a firm in distress have a choice of whether to proceed to debt restructuring or direct liquidation at an arbitrary time. In the model, we show the following results. Fewer asset sales, lower financing, debt renegotiation, and running costs, a lower premium to the debt holders, a lower cash flow volatility, and a higher initial coupon increase the shareholders f incentive to choose debt restructuring to avoid full liquidation. In the debt renegotiation process, the shareholders arrange the coupon reduction and use equity financing to retire a part of the debt value to the debt holders. The timing of debt restructuring always coincides with that of liquidation without debt renegotiation. Most notably, the shareholders do not prefer asset sale in debt restructuring even if they face high financing costs. The possibility of debt renegotiation in the future increases the initial leverage ratio in the optimal capital structure.

Keywords: Preemption; real options; asset sale; debt renegotiation; liquidation; capital structure. (search for similar items in EconPapers)
JEL-codes: C73 G31 G33 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2015-08
New Economics Papers: this item is included in nep-cfn and nep-ger
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Asset sale, debt restructuring, and liquidation (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:osk:wpaper:1522

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