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Debt Overhang and Debt Restructuring

43 Pages Posted: 6 Mar 2012  

Pascal Frantz

London School of Economics

Norvald Instefjord

University of Essex - Essex Business School

Date Written: March 5, 2012

Abstract

This paper analyzes how debt forgiveness and exchange offers resolve inefficiencies associated with debt overhang in a dynamic setting. In a static model debt forgiveness and exchange offers are equivalent -- in a dynamic model they are not. Debt forgiveness is feasible as a means to restructure debt when the firm expands into a competitive market, whereas exchange offers are necessary to eliminate the inefficiency of expansion into uncompetitive markets. We discuss the model in the light of existing empirical evidence and the empirical implications of the model.

Keywords: Debt forgiveness, Debt overhang, Debt restructuring, Growth opportunities, R&D investments

JEL Classification: G32, G33, G34

Suggested Citation

Frantz, Pascal and Instefjord, Norvald, Debt Overhang and Debt Restructuring (March 5, 2012). Available at SSRN: https://ssrn.com/abstract=2016321 or http://dx.doi.org/10.2139/ssrn.2016321

Pascal Frantz

London School of Economics ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
442079557233 (Phone)
442079557420 (Fax)

Norvald Instefjord (Contact Author)

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

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