Debt in Industry Equilibrium

Fries, Steven; Miller, Marcus; Perraudin, William

doi:10.1093/rfs/10.1.39

Cited by 86 publications

(109 citation statements)

References 30 publications

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“…(ii) The value of the firm's operations income flow, Π(x t ), and the liquidation value of the 24 This structure actually encompasses that of many existing corporate debt valuation models, including Merton (1974), Black and Cox (1976), Brennan and Schwartz (1984), Fischer, Heinkel and Zechner (1989), Mello and Parsons (1992), Kim, Ramaswamy and Sundaresan (1993), Longstaff and Schwartz (1995), Leland (1994), Leland and Toft (1996), Fries, Miller and Perraudin (1997) and Mella-Barral and Perraudin (1997). They either take the total value of the firm's assets or the price of the commodity produced as the driving process, and all assume x t to follow a geometric Brownian motion.…”

Section: A Closed-form Solutionsmentioning

confidence: 99%

Repeated Dilution of Diffusely Held Debt

Hege¹,

Mella‐Barral²

2005

J BUS

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Debt with many creditors is analyzed in a continuous-time pricing model of the levered firm in the presence of corporate taxes. We specifically allow for debtor opportunism in form of repeated strategic renegotiation offers and default threats. Dispersed creditors will only accept coupon concessions in exchange for guaranteed liquidation rights, e.g. collateral. The ex ante optimal debt contract is secured with assets which gradually become worthless as the firm approaches the preferred liquidation conditions, in order to allow for sufficient, but delayed renegotiability. Compared with singlecreditor debt, dispersed debt offers a larger debt capacity, and it is preferable ex-ante if the value of collateralizable assets is then reduced. Our model can explain credit risk premia in excess of those supported by a single creditor model with opportunistic renegotiation. Financial support for this project from the Financial Markets Group at the LSE and the hospitality of Tilburg University is gratefully acknowledged. We are grateful to seminar audiences at Aarhus, ESSEC, Groningen, LSE, Queen Mary and Westfield London, Mannheim, Odense, Rotterdam, Tilburg, Vienna, the CEPR Financial Markets Conference in Louvain-la-Neuve, and the CEPR Corporate Finance Conference in Courmayeur for helpful comments. We also wish to thank Sudipto Bhattacharya, Lara Cathart, Jon Danielsson, Darrell Duffie, Jan Ericsson, Martin Hellwig, David Webb and an anonymous referee for useful comments and advise. Any errors remain our responsibility.

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Section: A Closed-form Solutionsmentioning

confidence: 99%

Repeated Dilution of Diffusely Held Debt

Hege¹,

Mella‐Barral²

2005

J BUS

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“…Shareholders select the investment and default policy to maximize the value of their claims, taking price p as given. Assume that default is triggered by the decision of shareholders to cease raising additional equity to meet the coupon payment, as in Mello and Parsons (1992), Leland (1994), Fries et al (1997), Lambrecht (2001), and Duffie and Lando (2001).…”

Section: B5 Investment and Liquidation Decisionsmentioning

confidence: 99%

“…Under perfect competition, Leahy (1993) analyzes entry and exit under all equity financing in an industry equilibrium framework. Fries, Miller, and Perraudin (1997) generalize Leahy's model and study how entry and exit affect corporate asset valuation and capital structure.…”

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confidence: 99%

Optimal Capital Structure and Industry Dynamics

Miao

2003

SSRN Journal

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This paper provides a competitive equilibrium model of capital structure and industry dynamics. In the model, firms make financing, investment, entry, and exit decisions subject to idiosyncratic technology shocks. The capital structure choice ref lects the tradeoff between the tax benefits of debt and the associated bankruptcy and agency costs. The interaction between financing and production decisions inf luences the stationary distribution of firms and their survival probabilities. The analysis demonstrates that the equilibrium output price has an important feedback effect. This effect has a number of testable implications. For example, high growth industries have relatively lower leverage and turnover rates.THE INTERACTION BETWEEN CAPITAL STRUCTURE and product market decisions has recently received considerable attention in both economics and finance. Beginning with Brander and Lewis (1986, 1988) and Maksimovic (1988), a growing number of theoretical papers investigate this interaction. In addition, many empirical studies (Chevalier (1995a(Chevalier ( , 1995b, Phillips (1995), Kovenock and Phillips (1997), Maksimovic and Phillips (1998), Zingales (1998), Lang, Ofek, andStulz (1996), Mackay and Phillips (2004)) examine the relation between capital structure and firm entry, exit, investment and output decisions.1 These studies generally document the following:(1) Industry output is negatively associated with the average industry debt ratio. (2) Plant closings are positively associated with debt and negatively associated with plant-level productivity. (3) Firm entry is positively associated with debt of incumbents. (4) Firm investment is negatively associated with debt. (5) There is substantial inter-and intra-industry variation in leverage.

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“…The setting we employ here allows for the optimal investment timing, optimal capital structure decisions and optimal/endogenous default on risky debt by equity holders. In the Mauer and Sarkar 1 Fries et al (1997) explore the valuation of corporate securities (debt and equity) incorporating the tax benefits, bankruptcy costs and the agency costs of debt in a competitive industry with entry and exit decisions. Valuation of corporate securities in a duopoly with entry and exit decisions has been studied by Lambrecht (2001).…”

Section: Introductionmentioning

confidence: 99%

Investment options with debt-financing constraints

Koussis

Martzoukos

2012

The European Journal of Finance

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Building on the Mauer and Sarker (2005) model that captures both investment flexibility and optimal capital structure and risky debt, we study the impact of debt financing constraints on firm value, the optimal timing of investment and other important variables like the credit spreads. The importance of debt financing constraints on firm value and investment policy depends largely on the relative importance of investment timing flexibility and debt financing gains. In cases where investment flexibility has high relative importance the firm can mitigate the effects of debt financing constraints by adjusting its investment policy. We show that these adjustments are non-monotonic and may create a U shape of the investment trigger as a function of the degree that debt is constrained. We show that in a reduced investment horizon, constraints have a more significant impact on firm value. We also consider managerial pre-investment risky growth options (e.g. R&D, or pilot projects). We see that they reduce the maturity effect, and (in contrast to the Brownian volatility) they tend to reduce expected credit spreads.2

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Debt in Industry Equilibrium

Cited by 86 publications

References 30 publications

Repeated Dilution of Diffusely Held Debt

Repeated Dilution of Diffusely Held Debt

Optimal Capital Structure and Industry Dynamics

Investment options with debt-financing constraints

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