Optimal Debt Restructuring and Leverage with Credit Market Frictions

By introducing credit market frictions into the setting in which a firm has a option to restructure debt. We study the effects of credit market friction on the debt restructuring and leverage. The results show that the debt restructuring strategy will accelerate under lower credit market frictions. The more stable cash flow and the higher corporate tax rate have a positive effect on debt restructuring. The higher the possibility of debt restructure, the lower the initial optimal leverage. The initial optimal leverage is an U-shaped function of the cash flow volatility