Asset sale, debt restructuring, and liquidation

Michi Nishihara and Takashi Shibata ()

Journal of Economic Dynamics and Control, 2016, vol. 67, issue C, 73-92

Abstract: This paper considers a dynamic model in which shareholders of a firm in distress have a choice of whether the firm proceeds to debt restructuring or direct liquidation at an arbitrary time. In the model, we show the following results. Fewer asset sales, lower financing, debt renegotiation, and running costs, a lower premium to the debt holders, a lower cash flow volatility, and a higher initial coupon increase the shareholders׳ incentive to choose debt restructuring to avoid full liquidation. In the debt renegotiation process, the shareholders arrange the coupon reduction and use equity financing to retire a part of the debt value to the debt holders. The timing of debt restructuring always coincides with that of liquidation without debt renegotiation. Most notably, the shareholders do not prefer asset sale in debt restructuring even if they face high financing costs. The possibility of debt renegotiation in the future increases the initial leverage ratio in the optimal capital structure.

Keywords: Real options; Asset sale; Debt renegotiation; Liquidation; Capital structure (search for similar items in EconPapers)
JEL-codes: C73 G31 G33 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Working Paper: Asset sale, debt restructuring, and liquidation (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:67:y:2016:i:c:p:73-92

DOI: 10.1016/j.jedc.2016.03.011

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