A structural model of debt pricing with creditor-determined liquidation

Max Bruche, Hassan Naqvi

Research output: Contribution to journalArticleResearchpeer-review

11 Citations (Scopus)

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 languageEnglish
Pages (from-to)951-967
Number of pages17
JournalJournal of Economic Dynamics and Control
Volume34
Issue number5
DOIs
Publication statusPublished - 1 May 2010
Externally publishedYes

Keywords

  • Creditor induced liquidation
  • Defaultable debt pricing
  • Premature liquidation

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