When Does Strategic Debt Service Matter?

45 Pages Posted: 3 Nov 2008

See all articles by Viral V. Acharya

Viral V. Acharya

New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance

Jing-Zhi Huang

Pennsylvania State University - University Park - Department of Finance

Marti G. Subrahmanyam

New York University (NYU) - Department of Finance

Rangarajan K. Sundaram

New York University (NYU) - Department of Finance

Multiple version iconThere are 5 versions of this paper

Date Written: May 2002

Abstract

Recent work has suggested that strategic under performance of debt service obligations by equity holders can resolve the gap between observed yield spreads and those generated Merton (41) style models. We show that it is not quite correct. The value of the option to under perform on debt-service obligations depend on two other optionality's available to equity holders, namely, the option to carry cash reserves within the firm and the option to raise new external financing.

Suggested Citation

Acharya, Viral V. and Huang, Jing-Zhi Jay and Subrahmanyam, Marti G. and Sundaram, Rangarajan K., When Does Strategic Debt Service Matter? (May 2002). NYU Working Paper No. FIN-02-013. Available at SSRN: https://ssrn.com/abstract=1294186

Viral V. Acharya (Contact Author)

New York University - Leonard N. Stern School of Business ( email )

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HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

Centre for Economic Policy Research (CEPR)

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United Kingdom

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Jing-Zhi Jay Huang

Pennsylvania State University - University Park - Department of Finance ( email )

University Park, PA 16802
United States

HOME PAGE: http://www.personal.psu.edu/jxh56

Marti G. Subrahmanyam

New York University (NYU) - Department of Finance ( email )

Stern School of Business,
44 West 4th Street, Suite 9-68
New York, NY 10012-1126
United States
212-998-0348 (Phone)
212-995-4233 (Fax)

Rangarajan K. Sundaram

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0308 (Phone)
212-995-4233 (Fax)

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