Repeated dilution of diffusely held debt

Ulrich Hege and Pierre Mella-Barral

No 751, HEC Research Papers Series from HEC Paris

Abstract: Debt with many creditors is analyzed in a continuous-time pricing model of the levered firm in the presence of corporate taxes. We specifically allow for debtor opportunism in form of repeated strategic renegotiation offers and default threats. Dispersed creditors will only accept coupon concessions in exchange for guaranteed liquidation rights, e.g. collateral. The ex ante optimal debt contract is secured with assets which gradually become worthless as the firm approaches the preferred liquidation conditions, in order to allow for sufficient, but delayed renegotiability. Compared with single creditor debt, dispersed debt offers a larger debt capacity, and it is preferable ex-ante if the value of collateralizable assets is then reduced. Our model can explain credit risk premia in excess of those supported by a single creditor model with opportunistic renegotiation.

Keywords: debt reorganization; multiple creditors; priority of claims; debt pricing (search for similar items in EconPapers)
JEL-codes: G12 G32 G33 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2002-04-01
New Economics Papers: this item is included in nep-cfn and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Repeated Dilution of Diffusely Held Debt (2005)
Working Paper: Repeated Dilution of Diffusely Held Debt (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:0751

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