Distressed exchange, bargaining power, and prior capital structure

Sudipto Sarkar

Journal of Economic Dynamics and Control, 2013, vol. 37, issue 12, 2695-2709

Abstract: Financially troubled companies often make Distressed Exchange (DE) offers to its creditors, to postpone costly bankruptcy reorganization. We derive the optimal terms and timing of a DE offer consisting of debt reduction and an equity stake in the restructured firm. The DE terms and timing are affected by shareholder bargaining power, with greater shareholder bargaining power resulting in earlier DE offer, smaller debt reduction and smaller equity stake. The impact of shareholder bargaining power is greater when bankruptcy cost is larger and tax rate is higher. We also show that renegotiability of debt increases ex-ante firm value and results in a higher optimal leverage ratio. Both firm value and optimal leverage ratio are decreasing functions of shareholder bargaining power.

Keywords: Renegotiable debt; Bargaining power; Distressed exchange; Reorganization (search for similar items in EconPapers)
JEL-codes: G31 G32 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:37:y:2013:i:12:p:2695-2709

DOI: 10.1016/j.jedc.2013.07.002

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