A Structural Model of Debt Pricing with Creditor-Determined Liquidation

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

Max Bruche

Cass Business School, City University London

Hassan Naqvi

SKK Graduate School of Business

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)

Cass Business School, City University London ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 (20) 7040 5106 (Phone)
+44 (20) 7040 8881 (Fax)

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

Hassan Naqvi

SKK Graduate School of Business ( email )

206 International Hall
Seoul, 110-745
Korea, Republic of (South Korea)

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