Inside debt renegotiation: Optimal debt reduction, timing, and the number of rounds

Franck Moraux () and Florina Silaghi

Journal of Corporate Finance, 2014, vol. 27, issue C, 269-295

Abstract: This paper develops a model of debt renegotiation in a structural framework that accounts for taxes, bankruptcy costs and renegotiation costs. To our knowledge, all the previous work on debt renegotiation implies an infinite number of renegotiations. This feature preempts the analysis of the optimal number of renegotiations. We address this drawback by incorporating fixed renegotiation costs in a model of multiple renegotiations, hence obtaining a small finite number of renegotiations. Simple analytical formulae are derived for debt and equity, as well as implicit formulae for the coupon reduction, as a result of a backward recursive technique. The results show that the optimal number of renegotiations, the size and the dynamics of the coupon reductions depend critically on the bargaining power of the claimants. Testable empirical implications regarding multiple costly renegotiations are drawn.

Keywords: Debt renegotiation; Debt pricing; Strategic contingent claim analysis (search for similar items in EconPapers)
JEL-codes: G13 G30 G32 G33 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (22)

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Working Paper: Inside debt renegotiation: Optimal debt reduction, timing, and the number of rounds (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:27:y:2014:i:c:p:269-295

DOI: 10.1016/j.jcorpfin.2014.05.012

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