Recent work has suggested that strategic underperformance of debt-service obligations by equity holders can resolve the gap between observed yield spreads and those generated by Merton-style models. We show that this is not quite correct. The value of the option to underperform on debt-service...

Numerous studies have examined the effect on credit spreads of renegotiation. These studies have generally focussed on the impact on spread levels in general, and not on how renegotiation influences the relative pricing of senior versus junior debt claims. In this paper, we show that the scope...

In the last dozen years, economists have produced a considerable body of research suggesting that the historical origin of a country’s laws is highly correlated with a broad range of its legal rules and regulations, as well as with economic outcomes. Much of this research has dealt with rules...

Upstream producers that possess market power, sell forwards with a lengthy duration to regional electricity companies (REC). As part of the liberalization of the electricity market, RECs have been privatized and exposed to a possible bankruptcy threat if spot prices have fallen below their...

Firms that follow excessive payout policies (over-payers) are higher on the financial distress spectrum and have lower survival rates than under-payers. In addition, over-payers endure lower future sales and asset growth than under-payers and experience negative abnormal returns in the bond and...

We develop a model of investment, payout, and financing policies in which firms face uncertainty regarding their ability to raise funds and have to search for investors when in need of capital. We show that capital supply uncertainty leads firms to value financial slack and to adjust their...

This study extends the Grullon, Michaely and Swaminathan (2002) analysis by incorporating default risk. Using data for firms that either increased or initiated cash dividend payments during the 23-year period 1986-2008, we find reduction in default risk. This reduction is shown to be a priced...

This paper develops a new model of debt renegotiation in a structural framework, that accounts for both taxes and bankruptcy costs. We investigate situations where the manager can optimally (on behalf of the equity holder) impose a permanent coupon reduction to creditors, given that the new...

We analyze a defaultable firm's optimal capital and debt structures when its debt includes senior straight bonds and either Contingent Convertible or Write-Down bonds. The firm's stakeholders bear a liquidity risk prior to the debt maturity and a solvency risk at maturity. Credit events and...

We study the impact of the optimal debt and priority structure on corporate financing and investment decisions in a dynamic trade-off model, where a firm simultaneously issues bank and market debt. Private bank debt is renegotiable during financial distress; thus it avoids inefficient and costly...