The Valuation of Corporate Debt with Default Risk

Hassan Naqvi
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Hassan Naqvi: NUS Business School, & Financial Markets Group, LSE
Authors registered in the RePEc Author Service: Hassan Naqvi () and Hassan Raza Naqvi

Finance from EconWPA

Abstract: This article values equity and corporate debt by taking into account the fact that in practice the default point differs from the liquidation point and that it might be in the creditors' interest to delay liquidation. The article develops a continuous time asset pricing model of debt restructuring which explicitly considers the inalienability of human capital. The study finds that even though in general the creditors will not liquidate the firm on the incidence of default, but nevertheless would liquidate the firm prematurely relative to the first best threshold. This agency problem leads to the breakdown of the capital structure irrelevance result.

Keywords: Debt pricing; default risk; inalienability of human capital (search for similar items in EconPapers)
JEL-codes: G12 G33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn and nep-fin
Date: 2004-10-14
Note: Type of Document - pdf; pages: 26
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0410010

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