Pricing the Gamble for Resurrection and the Consequences of Renegotiation and Debt Design

Jean-Paul Décamps and A. Faure-Grimaud

Working Papers from Toulouse - GREMAQ

Abstract: This paper aims at measuring the loss in the value of a firm due to the gamble for resurrection, in a standard contingent claims model. Just before a debt repayment is due, the equityholders of a levered firm can decide to shut the firm down or to keep it as an ongoing concern. We study how leverage affects the operating decision and we provide a closed form formula for the associated agency costs. We show that yield spreads associated with defaultable bonds are higher than those obtained when ignoring the agency conflict.

Keywords: DEBT; PRICING; BONDS (search for similar items in EconPapers)
JEL-codes: G13 G30 L10 (search for similar items in EconPapers)
Pages: 50 pages
Date: 1997
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Persistent link: https://EconPapers.repec.org/RePEc:fth:gremaq:97.480

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