Extending the Maturity of a Defaulting Debt — The Longstaff Model Revisited

Shyan Yuan Lee () and Yi Fang Chung ()
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Shyan Yuan Lee: Department of Finance, National Taiwan University, No. 1, Sec. 4, Roosevelt Road, Da-an District, Taipei City 106, Taiwan
Yi Fang Chung: Department of Finance, National Taiwan University, Taiwan;

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2009, vol. 12, issue 01, 125-140

Abstract: This paper uses differing objective functions under the Longstaff model (1990) to discuss the strategic choices faced by the creditor when deciding whether to grant maturity extension on a defaulted loan. The results reveal that: (1) it ensures that the return per unit of risk is higher after maturity extension than before; (2) it recognizes that the risk profile of the firm substantially affects the strategic behavior of the creditor; and (3) it demonstrates that the higher the profit sharing percentage the creditor get, the more willing it will be to extend maturity.

Keywords: Defaulting debt; liquidation cost; maturity extension decisions; optimal extension period; Sharpe ratio; JEL Classification: GG13; JEL Classification: G33 (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2009
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DOI: 10.1142/S0219091509001575

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