A Theory of Capital Structure with Strategic Defaults and Priority Violations

Hans Hvide and Tore Leite

Finance from EconWPA

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.

Keywords: Cash Diversion; Costly State Verification; Outside Equity; Financial Contracts. (search for similar items in EconPapers)
JEL-codes: G (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn
Date: 2003-11-05
Note: Type of Document - pdf; prepared on WinXP; pages: 40
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Working Paper: A Theory of Capital Structure with Strategic Defaults and Priority Violations (2003)
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0311003

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