Pricing the Gamble for Resurrection and the Consequences of Renegotiation and Debt Design
نویسندگان
چکیده
This paper aims at measuring the loss in the value of a firm due to the gamble for resurrection, in a standard contingent claims model. Just before a debt repayment is due, the equityholders of a levered firm can decide to shut the firm down or to keep it as an ongoing concern. We study how leverage affects the operating decision and we provide a closed form formula for the associated agency costs. We show that yield spreads associated with defaultable bonds are higher than those obtained when ignoring the agency conflict. We also investigate the consequences of the design and renegotiation of debt. Jel Classification: G30, G13, L10.
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