Dynamic Capital Structure with Callable Debt and Debt Renegotiations

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Dynamic Capital Structure with Callable Debt and Debt Renegotiations

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Title: Dynamic Capital Structure with Callable Debt and Debt Renegotiations
Author: Christensen, Peter Ove; Flor, Christian Riis; Lando, David; Miltersen, Kristian R.
Abstract: We consider a dynamic trade-off model of a firm’s capital structure with debt renegotiation. Debt holders only accept restructuring offers from equity holders backed by threats which are in the equity holders’ own interest to execute. Our model shows that in a complete information model in which taxes and bankruptcy costs are the only frictions, violations of the absolute priority rule (APR) are typically optimal. The size of the bankruptcy costs and the equity holders’ bargaining power affect the size of APR violations, but they have only a minor impact on the choice of capital structure.
URI: http://hdl.handle.net/10398/9101
Date: 2015-01-26
Notes: NOTICE: this is the author’s version of a work that was accepted for publication in Journal of Corporate Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Corporate Finance, VOL29, December 2014. DOI:10.1016/j.jcorpfin.2013.09.001

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