Capital Structure and Debt Priority

Sami Attaoui

NEOMA Business School

Patrice Poncet

ESSEC Business School; Universite Paris I Pantheon Sorbonne

September 2, 2011

Paris December 2011 Finance Meeting EUROFIDAI - AFFI

We study a defaultable firm's debt priority structure in a simple structural model where the firm issues senior and junior bonds and is subject to both liquidity and solvency risks. Assuming that the absolute priority rule prevails and that liquidation is immediate upon default, we determine the firm's interior optimal priority structure along with its optimal capital structure. We also obtain closed-form solutions for the market values of the firm's debt and equity. We next assess the magnitude of the spread differential between junior and senior bond yields, which is positively but not linearly related to the total debt level and the riskiness of assets. We finally provide an in-depth analysis of probabilities of default and the term structure of credit spreads.

Keywords: Capital structure, Debt priority structure, Liquidation, Default probability, Credit spread

JEL Classification: G13, G32, G33

Not Available For Download

Date posted: October 13, 2011 ; Last revised: May 14, 2012

Suggested Citation

Attaoui, Sami and Poncet, Patrice, Capital Structure and Debt Priority (September 2, 2011). Paris December 2011 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=1943508 or http://dx.doi.org/10.2139/ssrn.1943508

Contact Information

Sami Attaoui (Contact Author)
NEOMA Business School ( email )
Boulevard André Siegfried - BP 215
Mont Saint Aignan, 76825
Patrice Poncet
ESSEC Business School ( email )
Avenue Bernard Hirsch
BP 105 Cergy Cedex, 95021
33 1 3443 3000 (Phone)
33 1 3443 3001 (Fax)
Universite Paris I Pantheon Sorbonne ( email )
Finance Department, UFR 06
17 rue de la Sorbonne
75005 Paris
33 1 40 46 2783 (Phone)
33 1 40 46 33 66 (Fax)
Feedback to SSRN

Paper statistics
Abstract Views: 915