Financial distress, refinancing, and debt structure
64 Pages Posted: 7 Oct 2015 Last revised: 30 Aug 2018
Date Written: August 30, 2018
We examine changes in debt structure when firms experience financial distress. At these points in time, firms refinance and undergo substantial changes in priority structure. Specifically, we find that firms di- versify their priority structure relative to its pre-distress composition. We show, using a simple model, that these changes are the firm’s optimal response to its joint liquidity and investment needs. Additional predictions on the yield spreads of bonds issued to meet the firm’s liquidity needs are also supported by the data.
Keywords: Capital structure, Debt structure, Credit downgrade, Priority spreading, Priority structure, Liquidity shock
JEL Classification: G32
Suggested Citation: Suggested Citation