Valuation of the Firm's Liabilities when Equity Holders are also Creditors
Marco Realdon
Discussion Papers from Department of Economics, University of York
Abstract:
This paper presents a tractable structural model whereby controlling equity holders are also among the creditors of the firm. As the firm approaches distress, equity holders can depauperate the firm and expropriate other creditors by repaying their credit before bankruptcy. The bankruptcy court's right to revoke such repayment protects arm's length creditors, reduces the cost of borrowing and induces equity holders to anticipate repayment of their credit. Equity holders decide repayment neither too early nor too late, so as to reduce the risk of repayment revocation by the bankruptcy court. Similar conclusions apply to the preferential repayment of bank loans personally guaranteed by equity holders. The analysis also suggests that callable bearer bonds may be more valuable to equity holders than to other creditors.
Keywords: equity holders's credit; debt repayment; assets liquidation; revocatoria; debt valuation; default; structural model (search for similar items in EconPapers)
JEL-codes: G13 G33 (search for similar items in EconPapers)
Date: 2006-08
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:yor:yorken:06/16
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