Inside debt renegotiation: Optimal debt reduction, timing, and the number of rounds

Franck Moraux () and Florina Silaghi ()
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Florina Silaghi: CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique

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Abstract: This paper develops a model of debt renegotiation in a structural framework that accounts for taxes, bankruptcy costs and renegotiation costs. To our knowledge, all the previous work on debt renegotiation implies an infinite number of renegotiations. This feature preempts the analysis of the optimal number of renegotiations. We address this drawback by incorporating fixed renegotiation costs in a model of multiple renegotiations, hence obtaining a small finite number of renegotiations. Simple analytical formulae are derived for debt and equity, as well as implicit formulae for the coupon reduction, as a result of a backward recursive technique. The results show that the optimal number of renegotiations, the size and the dynamics of the coupon reductions depend critically on the bargaining power of the claimants. Testable empirical implications regarding multiple costly renegotiations are drawn

Keywords: Debt renegotiation; debt pricing; strategic contingent claim analysis (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-ger
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-01024229
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Published in Journal of Corporate Finance, 2014, 2014 (27), pp.269-295. ⟨10.1016/j.jcorpfin.2014.05.012⟩

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Journal Article: Inside debt renegotiation: Optimal debt reduction, timing, and the number of rounds (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-01024229

DOI: 10.1016/j.jcorpfin.2014.05.012

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