Capital Structure and Asset Prices: Some Effects of Bankruptcy Procedures

Morellec, Erwan; François, Pascal

doi:10.2139/ssrn.288097

Cited by 68 publications

(86 citation statements)

References 27 publications

(33 reference statements)

Supporting

Mentioning

Contrasting

Unclassified

Order By: Relevance

“…ent bankruptcy procedures on the valuation of corporate securities, see François & Morellec (2004). 18 This is similar to the reasoning by Mello & Parsons (1992), or more recently Morellec (2004) …”

Section: Debt Claimsupporting

confidence: 54%

Informational Asymmetry Between Managers and Investors in the Optimal Capital Structure Decision

Bank

Lawrenz

2005

SSRN Journal

View full text Add to dashboard Cite

In this article, we consider the impact of asymmetric information between managers and investors on the optimal capital structure decision. This is done within a continuous-time framework, where the relevant state variable is given by the EBIT value of the firm; an approach taken by (2004) amongst others. Our setup differs in that we assume the EBIT to follow an Arithmetic Brownian motion, i.e. it can assume negative values. More importantly, we extend this framework in two directions: (i) We introduce a separate management claim. (ii) We introduce asymmetric information between managers and investors by assuming that claimants receive noisy signals, which they process according to rational expectation principles.Our results show, that managers always try to avoid debt, and that their optimal bankruptcy threshold is always lower, than the threshold set by equity holders. The introduction of asymmetric information changes the optimality conditions, and consequently the capital structure decision. It is shown, that the informational asymmetry can substantially lower the optimal leverage ratio, even without assuming that managers are entrenched.

show abstract

Section: Debt Claimsupporting

confidence: 54%

Informational Asymmetry Between Managers and Investors in the Optimal Capital Structure Decision

Bank

Lawrenz

2005

SSRN Journal

View full text Add to dashboard Cite

show abstract

“…Following Merton's (1974) pathbreaking work, the basic structural model has been extended in different ways. 8 While these models typically focus on the importance of additional theoretical variables, or change the precise functional dependence of default on existing theoretical 8 See Black and Cox (1976), Geske (1977), Fischer, Heinkel, and Zechner (1989), Kim, Ramaswamy, andSundaresan (1993), Nielsen, Saa-Requejo, andSanta-Clara (1993), Leland (1994), Longstaff and Schwartz (1995), Anderson and Sundaresan (1996), Leland and Toft (1996), Mella-Barral and Perraudin (1997), Zhou (1997), Leland (1998), Mella-Barral (1999, Duffie and Lando (2000), , François and Morellec (2004). 5 variables, they all have in common that default and therefore the value of the default sensitive security depends on a number of determinants that are central to the Merton (1974) approach.…”

Section: The Theoretical Determinants Of Credit Default Swap Premiamentioning

confidence: 99%

The Determinants of Credit Default Swap Premia

Ericsson¹,

Jacobs²,

Oviedo³

2009

J. Financ. Quant. Anal.

547

214

View full text Add to dashboard Cite

Variables that in theory determine credit spreads have limited explanatory power in existing empirical work on corporate bond data. We investigate the linear relationship between theoretical determinants of default risk and default swap spreads. We find that estimated coefficients for a minimal set of theoretical determinants of default risk are consistent with theory and are significant statistically and economically. Volatility and leverage have substantial explanatory power in univariate and multivariate regressions. A principal component analysis of residuals and spreads indicates limited evidence for a residual common factor, confirming that the theoretical variables explain a significant amount of the variation in the data.

show abstract

“…François and Morellec (2004) have modelled default in a setup where default does not imply immediate liquidation. As is the case in our model, in these models, equityholders inject less cash vis-a-vis the case of Leland (1994) and hence default occurs earlier.…”

Section: Discussionmentioning

confidence: 99%

“…However, in these models the liquidation decision is determined exogenously. 13 For instance, in François and Morellec (2004) the firm is liquidated if the time spent in default (an observation period or grace period) exceeds an exogenously specified number of days. Thus liquidation happens with a certain exogenous probability once the equityholders default on the coupon payments.…”

Section: Discussionmentioning

confidence: 99%

“…For instance, in the model by François and Morellec (2004), default is triggered by the equityholders but the company is liquidated only once the consecutive time spent in default exceeds an exogenous grace period. Similarly, in the model of Moraux (2002) liquidation occurs when the cumulative time spent in default exceeds an exogenous grace period, and in the model of Galai et al (2007), liquidation occurs when consecutive time in distress, weighted by distress severity exceeds an exogenous threshold.…”

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

A structural model of debt pricing with creditor-determined liquidation

Bruche

Naqvi

2010

Journal of Economic Dynamics and Control

View full text Add to dashboard Cite

Citation: Bruche, M. and Naqvi, H. (2010). A structural model of debt pricing with creditordetermined liquidation. Journal of Economic Dynamics and Control, 34(5), pp. 951-967. doi: 10.1016/j.jedc.2010.01.005 This is the unspecified version of the paper.This version of the publication may differ from the final published version. Permanent AbstractThis paper develops a continuous time asset pricing model of debt and equity in a framework where equityholders decide when to default but creditors decide when to liquidate. This framework is relevant for environments where creditors exert a significant influence on the timing of liquidation, such as those of countries with creditor-friendly bankruptcy regimes, or in the case of secured debt. The interaction between the decisions of equityholders and creditors introduces an agency problem whereby equityholders default too early and creditors subsequently liquidate too early. Our model allows us to assess quantitatively how this problem affects the timing of default and liquidation, optimal capital structure, and spreads.

show abstract

Capital Structure and Asset Prices: Some Effects of Bankruptcy Procedures

Cited by 68 publications

References 27 publications

Informational Asymmetry Between Managers and Investors in the Optimal Capital Structure Decision

Informational Asymmetry Between Managers and Investors in the Optimal Capital Structure Decision

The Determinants of Credit Default Swap Premia

A structural model of debt pricing with creditor-determined liquidation

Contact Info

Product

Resources

About