How do reservation prices impact distressed debt rescheduling?

Franck Moraux () and Patrick Navatte

Economic Modelling, 2015, vol. 46, issue C, 269-282

Abstract: This paper is the first to investigate rescheduling of distressed corporate debt when both the representative shareholder and the creditor face reservation prices. Parties expect from rescheduling both recovery and growth, but reservation prices are key dimensions to consider in the analysis in order to assess the opportunity and to design the new financial set-up. For reservation price, the creditor may have in mind the liquidation value of the firm he can get by a strict enforcement of his contractual rights in court. The shareholder requires from rescheduling the recognition of her risky, specific and important (financial and intangible) involvements in the future. To shed light on rescheduling with reservation prices, we develop first a general parsimonious distribution-free structural framework. We derive sufficient conditions for rescheduling to take place and highlight situations where no rescheduling can occur. We characterize cases where rescheduling is for the creditor possible but sub-optimal. So the shareholder's reservation price can dramatically restrict the set of possible extensions and it does matter for the creditor. We then restrict our setting to undertake numerical analysis, our benchmark being the canonical rescheduling model of Longstaff (1990). Here, we can explore with simulations feasibility and optimality of rescheduling for different magnitudes of reservation prices and different firms' profiles. We finally investigate various concerns related to rescheduling such as agency costs, exit from no-rescheduling situations and bargaining between stakeholders. We also discuss different ways to lower the shareholder's reservation price.

Keywords: Distressed debt; Bankruptcy costs; Debt rescheduling; Reservation price; Contingent claim analysis; Business risk (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0264999314004702
Full text for ScienceDirect subscribers only

Related works:
Working Paper: How do reservation prices impact distressed debt rescheduling? (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:46:y:2015:i:c:p:269-282

DOI: 10.1016/j.econmod.2014.12.004

Access Statistics for this article

Economic Modelling is currently edited by S. Hall and P. Pauly

More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().