Cookies?
Library Header Image
LSE Research Online LSE Library Services

Debt overhang and non-distressed debt restructuring

Frantz, Pascal and Instefjord, Norvald (2018) Debt overhang and non-distressed debt restructuring. Journal of Financial Intermediation. ISSN 1042-9573

[img] Text - Accepted Version
Restricted to Repository staff only until 6 March 2019.

Download (661kB) | Request a copy

Identification Number: 10.1016/j.jfi.2018.08.002

Abstract

In this paper, we analyse the restructuring of debt in the presence of debt overhang. The firm starts out with a debt liability and an investment opportunity. Then with unrestructured debt, the firm maintains the current borrowing payments until default or investment. If the creditors allow the parties to restructure the debt with exchange offers, then the borrowing payments change as well as the default and investment points. We find that there is a unique optimal restructuring path which maintains debt at positive levels but defers default indefinitely. This path is optimal regardless of whether the debt holders or the firm control the process through superior bargaining power. Moreover, a debt-for-equity exchange to remove all existing debt takes place just before investment that is followed by the issue of an optimal amount of new debt as part of the funding for the investment cost. The optimal investment trigger is higher along the optimal restructuring path than it is for an unlevered firm. We discuss the findings in the light of existing empirical evidence

Item Type: Article
Official URL: https://www.sciencedirect.com/journal/journal-of-f...
Additional Information: © 2018 Elsevier Inc.
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
H Social Sciences > HG Finance
JEL classification: G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
G - Financial Economics > G3 - Corporate Finance and Governance > G33 - Bankruptcy; Liquidation
G - Financial Economics > G3 - Corporate Finance and Governance > G34 - Mergers; Acquisitions; Restructuring; Corporate Governance
Sets: Departments > Accounting
Date Deposited: 12 Sep 2018 14:31
Last Modified: 12 Sep 2018 14:55
URI: http://eprints.lse.ac.uk/id/eprint/90212

Actions (login required)

View Item View Item

Downloads

Downloads per month over past year

View more statistics