FINANCING AND INVESTMENT STRATEGIES UNDER CREDITOR-MAXIMIZED LIQUIDATION

Takashi Shibata () and Michi Nishihara ()
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Michi Nishihara: Graduate School of Economics, Osaka University, Osaka 560-0043, Japan

International Journal of Theoretical and Applied Finance (IJTAF), 2021, vol. 24, issue 03, 1-30

Abstract: We develop a contingent claim model to examine the interaction between financing and investment where equity holders decide when to default and debt holders decide when to liquidate as well as maximize the liquidation value. We show that if the debt holders maximize the residual value at liquidation, an increase in liquidation value increases the amount of debt issuance and investment quantity ex ante, delaying corporate investment. This relationship is based on the fact that an increase in the liquidation value decreases the credit spread of debt holders. These results fit well with those of existing empirical studies.

Keywords: Real options; creditor induced liquidation; debt issuance; credit spreads (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1142/S0219024921500138

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