Repurchasing Debt

Lei Mao () and Yuri Tserlukevich ()
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Lei Mao: Finance Group, Warwick Business School, University of Warwick, Coventry CV4 7AL, United Kingdom
Yuri Tserlukevich: Department of Finance, Arizona State University, Tempe, Arizona 85287

Management Science, 2015, vol. 61, issue 7, 1648-1662

Abstract: In this paper we build a theoretical model of a firm repurchasing its corporate debt. We find that firm creditors as a group sell debt to the firm only at face value. However, because of the cross-creditor externalities, buying back debt is cheaper and easier when there are many creditors, e.g., when debt is traded on the open market. We further show that repurchases contribute to flexibility in firms' capital structure and can increase ex ante firm value. The value of repurchases to the shareholders increases with the firm's ability to save cash and delay the repurchase.Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2014.1965 . This paper was accepted by Brad Barber, finance.

Keywords: savings; debt repurchase; debt overhang (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (1)

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