Dynamic capital structure with callable debt and debt renegotiations

Peter Ove Christensen, Christian Flor, David Lando and Kristian R. Miltersen

Journal of Corporate Finance, 2014, vol. 29, issue C, 644-661

Abstract: We consider a dynamic trade-off model of a firm's capital structure with debt renegotiation. Debt holders only accept restructuring offers from equity holders backed by threats which are in the equity holders' own interest to execute. Our model shows that in a complete information model in which taxes and bankruptcy costs are the only frictions, violations of the absolute priority rule (APR) are typically optimal. The size of the bankruptcy costs and the equity holders' bargaining power affect the size of APR violations, but they have only a minor impact on the choice of capital structure.

Keywords: Dynamic capital structure; Debt restructuring; Violation of absolute priority (search for similar items in EconPapers)
JEL-codes: G13 G32 G33 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:29:y:2014:i:c:p:644-661

DOI: 10.1016/j.jcorpfin.2013.09.001

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