Debt Overhang and Debt Restructuring
London School of Economics
University of Essex - Essex Business School
March 5, 2012
This paper analyzes how debt forgiveness and exchange offers resolve inefficiencies associated with debt overhang in a dynamic setting. In a static model debt forgiveness and exchange offers are equivalent -- in a dynamic model they are not. Debt forgiveness is feasible as a means to restructure debt when the firm expands into a competitive market, whereas exchange offers are necessary to eliminate the inefficiency of expansion into uncompetitive markets. We discuss the model in the light of existing empirical evidence and the empirical implications of the model.
Number of Pages in PDF File: 43
Keywords: Debt forgiveness, Debt overhang, Debt restructuring, Growth opportunities, R&D investments
JEL Classification: G32, G33, G34
Date posted: March 6, 2012
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