Valuing Corporate Liabilities When the Default Threshold is not an Absorbing Barrier

Moraux, Franck

doi:10.2139/ssrn.314404

Cited by 35 publications

(31 citation statements)

References 21 publications

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“…Moraux (2002), François and Morellec (2004), Galai, Raviv and Wiener (2007), and Broadie, Chernov and Sundaresan (2007) assume that liquidation after Chapter 11 is triggered by the excursion of asset value beneath a default threshold. In these works however, the role of the judge is not taken into account.…”

Section: Related Literaturementioning

confidence: 99%

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Resolution of financial distress under Chapter 11

Annabi

Breton

François

2012

Journal of Economic Dynamics and Control

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Abstract:We develop a contingent claims model of a firm in financial distress with a formal account for renegotiations under the Chapter 11 bankruptcy procedure. Shareholders and two classes of creditors (senior and junior) alternatively propose a reorganization plan subject to a vote. The bankruptcy judge can intervene in any renegotiation round to impose a plan. The multiple-stage bargaining process is solved in a non-cooperative game theory setting. The calibrated model yields liquidation rate, Chapter 11 duration and percentage of deviations from the Absolute Priority Rule that are consistent with empirical evidence.

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Section: Related Literaturementioning

confidence: 99%

“…R d (v; y ; k) < b f , it is not possible for the leader to o¤er a plan that will be accepted by Follower 1. Otherwise, the leader maximizes his share by proposing plan y , and the relative share of the two creditors is obtained by solving (41).…”

Section: = (A; A)mentioning

confidence: 99%

Resolution of financial distress under Chapter 11

Annabi

Breton

François

2012

Journal of Economic Dynamics and Control

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“…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. 2 In all of these papers, default is determined by equityholders but liquidation is triggered by an exogenous criterion which is meant to capture the Court's behavior under Chapter 11.…”

Section: Introductionmentioning

confidence: 99%

A structural model of debt pricing with creditor-determined liquidation

Bruche

Naqvi

2010

Journal of Economic Dynamics and Control

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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.

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“…The way Parisian options turn up in real option problems is treated in [11], for an application in the direction of convertible bonds see [18]. For applications in credit risk and life insurance see [19] and [6] respectively. The authors in [8] derived Laplace transforms for the single-sided version, which is extended in [11] to a Parisian type of contract that is triggered by staying a period of time above the barrier or hitting a level exceeding this barrier.…”

Section: Introductionmentioning

confidence: 99%

Double-sided Parisian option pricing

Anderluh

Weide

2009

Finance Stoch

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In this paper we derive Fourier transforms for double-sided Parisian option contracts. The double-sided Parisian option contract is triggered by the stock price process spending some time above an upper level or below some lower level. The double-sided Parisian knock-in call contract is the general type of Parisian contract from which also the single-sided contract types follow. The paper gives an overview of the different types of contracts that can be derived from the double-sided Parisian knock-in calls, and, after discussing the Fourier inversion, it concludes with various numerical examples, explaining the, sometimes peculiar, behavior of the Parisian option.The paper also yields a nice result on standard Brownian motion. The Fourier transform for the double-sided Parisian option is derived from the Laplace transform of the double-sided Parisian stopping time. The probability that a standard Brownian motion makes an excursion of a given length above zero before it makes an excursion of another length below zero follows from this Laplace transform and is not very well known in the literature. In order to arrive at the Laplace transform, a very careful application of the strong Markov property is needed, together with a non-intuitive lemma that gives a bound on the value of Brownian motion in the excursion.

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Valuing Corporate Liabilities When the Default Threshold is not an Absorbing Barrier

Cited by 35 publications

References 21 publications

Resolution of financial distress under Chapter 11

Resolution of financial distress under Chapter 11

A structural model of debt pricing with creditor-determined liquidation

Double-sided Parisian option pricing

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