Write-down bonds, credit risk and imperfect information

Zhiming Zhao, Shasha Li and Huiling Tang

The North American Journal of Economics and Finance, 2021, vol. 57, issue C

Abstract: A structural model of pricing Write-Down (hereafter WD) bonds under imperfect information has been developed to investigate the effect of WD bonds issuance on credit risk. Information is not only delayed but also asymmetrically distributed between managers and outside investors. We derive analytical solutions for corporate securities prices and find the issuance of WD bonds could significantly improve firm value via reducing bankruptcy cost. Our numerical results further demonstrate that the WD bonds issuance increases corporate risk tolerance and reduces the risk of bankruptcy and credit spreads under imperfect information.

Keywords: Asymmetric information; Credit risk; Write-down bonds (search for similar items in EconPapers)
JEL-codes: G11 G32 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:57:y:2021:i:c:s1062940821000176

DOI: 10.1016/j.najef.2021.101378

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