A Structural Model of Debt Pricing with Creditor-Determined Liquidation
29 Pages Posted: 1 Oct 2009 Last revised: 2 Dec 2011
Date Written: January 6, 2010
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: Suggested Citation
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