Liquidation triggers and the valuation of equity and debt

Galai, Dan; Raviv, Alon; Wiener, Zvi

doi:10.1016/j.jbankfin.2007.01.012

Cited by 59 publications

(30 citation statements)

References 36 publications

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“…Further, given the possibility that high credit quality firms may be more likely to contract upon accounting covenants, the results are found to be robust to a matched‐pair design enlisted to mitigate self‐selection concerns. Collectively, the evidence presented is consistent with accounting covenants providing a disciplining mechanism for firms to renegotiate ahead of technical default to prevent acceleration and possible bankruptcy (Huberman and Kahn, ; and Galai et al., ).…”

Section: Introductionsupporting

confidence: 67%

The Ex‐Ante Monitoring Role of Accounting Covenants in Public Debt

Bozanic

2016

Business Fin & Account

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for their guidance and support. I am also indebted to Romano Peluso and Ronald Rose for their many discussions regarding bond indenture, bond trustee, and bankruptcy law. The Ex-Ante Monitoring Role of Accounting Covenants in Public Debt ABSTRACTIn contrast to what is known about accounting covenants in private debt, little empirical evidence on the role of accounting covenants in public debt exists. Diffuse ownership, arm's length monitoring, and collective action problems are unique to the public debt setting and raise the question of whether these covenants serve their intended role. As such, this study investigates whether including covenants reliant upon accounting inputs influences borrowers' actions to prevent adverse credit events. Accounting covenants in the public debt setting provide firms with a disciplining mechanism to renegotiate ahead of costly technical default-a stark contrast to the ex-post renegotiation -trip wire‖ role covenants play in private debt. In particular, the results show that including accounting covenants in public debt is associated with an increased probability of ex-ante renegotiation, that is, negotiation through consent solicitations ahead of covenant violation. This ex-ante renegotiation, in turn, is associated with decreased adverse credit events. Cross-sectional results support these findings as the ex-ante renegotiation role of accounting covenants varies with bondholders' and trustees' monitoring ability.JEL Classification: G32, L14, M41

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Section: Introductionsupporting

confidence: 67%

The Ex‐Ante Monitoring Role of Accounting Covenants in Public Debt

Bozanic

2016

Business Fin & Account

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“…The index ranges from zero to four with higher scores denoting stronger creditor rights. Galai et al (2007) develop a model that shows recent or severe distress events have greater impact on the liquidation trigger. 17 In terms of economic significance, a rise in shareholder rights index from one (weakest) to five (strongest) increases probability of conversion by 39%.…”

Section: Modelmentioning

confidence: 99%

Investor protection and convertible debt design

Lee

Yeo

2009

Journal of Banking & Finance

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“…François and Morellec (2004) consider that equity is best modelled as a Parisian option (the firm is not liquidated unless a certain uninterrupted amount of time is spent below the barrier), while Moraux (2002) argues for a Parasian option framework (instead of resetting the clock to zero every time the asset value rises above the barrier, the model considers a firm bankrupt after its asset value has spent a certain cumulative time below the barrier). More recently, Galai et al (2005) generalize the two approaches and allow for the distress clock to give more weight to more recent visits below the barrier and for the severity of distress (how far below the barrier the asset process dips) to play a role. 9 This research is based on the realization that negative net worth (i.e., the asset value dropping below the firm's debt obligations) is not sufficient to trigger automatic default, making a default-triggering barrier level larger then these debt obligations even more unrealistic.…”

Section: Bankruptcy Barriers and Actual Defaultsmentioning

confidence: 99%