Optimal Debt Structure and the Number of Creditors

Abstract

Within an optimal contracting framework, we analyze the optimal number of creditors a company borrows from. We also analyze the optimal allocation of security interests among creditors and intercreditor voting rules that govern renegotiation of debt contracts. The key to our analysis is the idea that these aspects of the debt structure affect the outcome of debt renegotiation following a default. Debt structures that lead to inefficient renegotiation are beneficial in that they deter default, but they are also costly if default is beyond a manager's control. The optimal debt structure balances these effects. We characterize how the optimal debt structure depends on firm characteristics such as its technology, its credit rating, and the market for its assets.

The role of information and financial reporting in corporate governance and debt contracting

“…There are also a number of papers that investigate the liquidation value of assets and the way in which the liquidation value of the firm's assets affects the availability of credit, the proportion of debt and equity in the firm's capital structure, and the maturity of the firm's debt (e.g., Aghion and Bolton, 1992;Shleifer and Vishny, 1992;Bolton and Scharfstein, 1996;andMoore, 1994 and. These papers are potentially of interest to accountants for a variety of reasons.…”

Corporate deductibility provisions and managerial incentives

“…To the best of our knowledge, the effects of taxes and, in particular, of deductibility provisions when internal and external governance systems are used simultaneously have not been analyzed so far. 7 The paper proceeds as follows. In Section 2 we set up an agency model of free cash flow with endogenous incentive pay.…”

Contractual Resolutions of Financial Distress

“…Hart andMoore (1998), Bolton andScharfstein (1996)], we assume that it is easier to pledge to investors physical collateral rather than cash flows. For simplicity, we assume that the full liquidation value L of physical collateral can be pledged to I, even though allowing investor protection to increase the pledgeability of physical collateral would not change our results, as long as physical collateral remains easier to pledge than cash flows.…”