A Structural Model of Debt Pricing with Creditor-Determined Liquidation

29 Pages Posted: 1 Oct 2009 Last revised: 2 Dec 2011

See all articles by Max Bruche

Max Bruche

Humboldt University of Berlin

Hassan Naqvi

Monash University

Date Written: January 6, 2010

Abstract

This paper develops a continuous time asset pricing model of debt and equity in a framework where equityholders decide when to default but creditors decide when to liquidate. This framework is relevant for environments where creditors exert a significant influence on the timing of liquidation, such as those of countries with creditor-friendly bankruptcy regimes, or in the case of secured debt. The interaction between the decisions of equityholders and creditors introduces an agency problem whereby equityholders default too early and creditors subsequently liquidate too early. Our model allows us to assess quantitatively how this problem affects the timing of default and liquidation, optimal capital structure, and spreads.

Keywords: Defaultable Debt Pricing, Creditor Induced Liquidation,Premature Liquidation

JEL Classification: G12, G13, G32, G33

Suggested Citation

Bruche, Max and Naqvi, Hassan, A Structural Model of Debt Pricing with Creditor-Determined Liquidation (January 6, 2010). Journal of Economic Dynamics and Control, Vol. 34, pp. 951-967, 2010 , Available at SSRN: https://ssrn.com/abstract=1480573

Max Bruche (Contact Author)

Humboldt University of Berlin ( email )

Spandauer Str. 1
Berlin, D-10099
Germany

HOME PAGE: http://www.maxbruche.net

Hassan Naqvi

Monash University ( email )

Wellington Road
Clayton, Victoria 3168
Australia

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