Capital structure and debt priority

Sami Attaoui and Patrice Poncet
Additional contact information
Patrice Poncet: ESSEC Business School

Post-Print from HAL

Abstract: We study a defaultable firm's debt priority structure in a simple structural model where the firm issues senior and junior bonds and is subject to both liquidity and solvency risks. Assuming that the absolute priority rule prevails and that liquidation is immediate upon default, we determine the firm's interior optimal priority structure along with its optimal capital structure. We also obtain closed-form solutions for the market values of the firm's debt and equity. We find that the magnitude of the spread differential between junior and senior bond yields is positively, but not linearly related to the total debt level and the riskiness of assets. Finally, we provide an in-depth analysis of probabilities of default and the term structure of credit spreads.

Date: 2013-02-28
References: Add references at CitEc
Citations: View citations in EconPapers (7)

Published in Financial Management, 2013, Vol. 42 (n° 4), pp 737-775. ⟨10.1111/fima.12011⟩

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Journal Article: Capital Structure and Debt Priority (2013)
Working Paper: Capital structure and debt priority (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00956666

DOI: 10.1111/fima.12011

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().