Financial distress, refinancing, and debt structure

64 Pages Posted: 7 Oct 2015 Last revised: 30 Aug 2018

See all articles by Evan Dudley

Evan Dudley

Queen's University - Smith School of Business

Qie Ellie Yin

Hong Kong Baptist University

Date Written: August 30, 2018

Abstract

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

Dudley, Evan and Yin, Qie Ellie, Financial distress, refinancing, and debt structure (August 30, 2018). Journal of Banking and Finance, Vol. 94, September 2018. Available at SSRN: https://ssrn.com/abstract=2669480 or http://dx.doi.org/10.2139/ssrn.2669480

Evan Dudley (Contact Author)

Queen's University - Smith School of Business ( email )

Goodes Hall
Kingston, Ontario K7L 3N6
Canada

Qie Ellie Yin

Hong Kong Baptist University ( email )

WLB 922, 34 Renfrew Road
Hong Kong Baptist University
Kowloon Tong, 0000
Hong Kong
(852)34115792 (Phone)

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