Capital Structure and Real Assets: Effects of an Implicit Collateral to Debt Holders

EFA 2002 Berlin Meetings Presented Paper

25 Pages Posted: 16 Mar 2002

Date Written: February 28, 2002

Abstract

This paper analyzes how real assets implicitly provide a collateral for debt when an initially profitable production becomes relatively non-profitable in a structural model framework. Ex ante, the implicit collateral will benefit the firm owners because the tax shield can be better exploited. Results indicate that the firm value can increase by 40-50% and the par yield may decrease about 200 bps. The possibility to sell the assets extends the equity holders' strategy space: entering a renegotiation process with the debt holders may lead to either a restructuring of the firm's capital or an asset sale. The model further provides an argument for why Internet firms lose value fast when the initial production fails to be profitable.

Keywords: Optimal capital structure, real assets, liquidation, debt restructuring, Internet firm valuation

JEL Classification: G13, G32, G33

Suggested Citation

Flor, Christian Riis, Capital Structure and Real Assets: Effects of an Implicit Collateral to Debt Holders (February 28, 2002). EFA 2002 Berlin Meetings Presented Paper, Available at SSRN: https://ssrn.com/abstract=302314 or http://dx.doi.org/10.2139/ssrn.302314

Christian Riis Flor (Contact Author)

University of Southern Denmark ( email )

Campusvej 55
Odense DK-5230
Denmark
+45 6550 3384 (Phone)
+45 6593 0726 (Fax)

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