Capital Structure and Asset Prices: Some Effects of Bankruptcy Procedures

32 Pages Posted: 2 Nov 2001

See all articles by Erwan Morellec

Erwan Morellec

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Pascal Francois

HEC Montreal - Department of Finance

Date Written: April 2002

Abstract

This paper examines the impact of the U.S. bankruptcy procedures on the valuation of corporate securities and capital structure decisions. We provide closed-form solutions for the values of corporate debt and equity when defaulting firms can either liquidate their assets or renegotiate outstanding debt under the Court protection. The paper shows that the possibility to renegotiate the debt contract (i) has an ambiguous impact on leverage choices and (ii) unambiguously increases credit spreads on corporate debt. The analysis also reveals that the sharing rule of cash flows during bankruptcy has a large impact on optimal leverage. By contrast, credit spreads on corporate debt show little sensitivity to this very parameter.

JEL Classification: G12, G32, G33

Suggested Citation

Morellec, Erwan and Francois, Pascal, Capital Structure and Asset Prices: Some Effects of Bankruptcy Procedures (April 2002). Available at SSRN: https://ssrn.com/abstract=288097 or http://dx.doi.org/10.2139/ssrn.288097

Erwan Morellec (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

College of Management
Extranef Quartier UNIL-Dorigny
1015 Lausanne, CH-1015
Switzerland

HOME PAGE: http://sfi.epfl.ch/

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Pascal Francois

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-7743 (Phone)
514-340-5632 (Fax)

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