Investment timing, capital structure and interest rate spread under different debt-renegotiation schemes
Event details
| Date | 05.07.2016 |
| Hour | 12:00 › 13:00 |
| Speaker | Aude POMMERET (City University of Hong Kong) |
| Location | |
| Category | Conferences - Seminars |
This paper revisits the question of how to organize debt renegotiation of financially weak firms. We not only consider the balance of rights between creditors and debtors but also the type of debt renegotiation scheme (debt equity swap, debt write-down) available to stakeholders. We solve analytically a model of investment timing, financial structure, default, and debt renegotiation under uncertainty. We then compare firms’ decisions across debt renegotiation schemes and with Sundaresan and Wang (2007) type of renegotiation as well as with the situation where there is no debt-renegotiation. We show that the debt renegotiation scheme available to stakeholders matters as much as the balance of rights between creditors and shareholders: optimal leverage, spread, investment timing and renegotiation probability differ depending on the renegotiation scheme and the magnitude of the differences between schemes is as large as that within a given scheme for different shareholder rights. In addition, interest rate spread (on new debt) is independent of creditor rights under debt write-down.
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