Optimal default and liquidation with tangible assets and debt renegotiation

Makoto Goto and Teruyoshi Suzuki

Review of Financial Economics, 2015, vol. 27, issue C, 16-27

Abstract: We propose a pricing model for corporate securities issued by a levered firm with the possibility of debt renegotiation, where the firm’s earnings follow a geometric Brownian motion with stochastic collaterals. While equity holders can default the firm when the earnings become insufficient, they may liquidate it by repaying the face value of debt when the value of collaterals becomes sufficiently high. Unlike the existing models, the bivariate structure enables us to distinguish strategic default, liquidity default and ordinary liquidation, which makes the contribution of strategic debt service to credit spreads lower than that obtained in the previous models.

Keywords: Finance; Debt renegotiation; Strategic debt service; Credit spread (search for similar items in EconPapers)
JEL-codes: D81 G32 G33 G35 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eee:revfin:v:27:y:2015:i:c:p:16-27

DOI: 10.1016/j.rfe.2015.07.001

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