Abstract
This 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.
Original language | English |
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Pages (from-to) | 951-967 |
Number of pages | 17 |
Journal | Journal of Economic Dynamics and Control |
Volume | 34 |
Issue number | 5 |
DOIs | |
Publication status | Published - 1 May 2010 |
Externally published | Yes |
Keywords
- Creditor induced liquidation
- Defaultable debt pricing
- Premature liquidation