On debt service and renegotiation when debt-holders are more strategic

Sur le service de la dette et la renégociation lorsque les détenteurs de la dette sont plus stratégiques

Jean-Marc Bourgeon and Georges Dionne ()

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Abstract: The contingent claims analysis of firm financing often presents a debt renegotiation game with a passive bank that does not use its ability to force liquidation strategically, contrary to what is observed in practice. We consider two motives that may lead a bank to refuse to renegotiate: maintaining its reputation to preserve its future lending activity and deterring firms from overstating their debt service abatement when they renegotiate. We show that with public information and private debt only, the optimal probability of debt renegotiation is high when the firm's anticipated liquidation value is high. Under asymmetric information about liquidation value, the high liquidation value firm may be tempted to mimic the low liquidation value firm to reduce its debt service. To deter such mimicking, banks may sometimes refuse to renegotiate with firms having a low liquidation value.

Keywords: risque de crédit; renégociation de la dette; risque de défaut; faillite et liquidation; théorie des options (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (13)

Published in Journal of Financial Intermediation, 2013, 22 (3), pp.353-372. ⟨10.1016/j.jfi.2012.09.002⟩

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Related works:
Journal Article: On debt service and renegotiation when debt-holders are more strategic (2013)
Working Paper: On Debt Service and Renegotiation when Debt-holders Are More Strategic (2007)
Working Paper: On debt service and renegotiation when debt-holders are more strategic (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01000655

DOI: 10.1016/j.jfi.2012.09.002

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