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Liquidation Triggers and the Valuation of Equity and Debt

35 Pages Posted: 3 Aug 2005  

Dan Galai

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Alon Raviv

Bar-Ilan University - Graduate School of Business Administration

Zvi Wiener

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Date Written: April 2003

Abstract

Many bankruptcy codes implicitly or explicitly contain net-worth covenants, which provide the firm's bondholders with the right to force reorganization or liquidation if the value of the firm falls below a certain threshold. In practice, however, default does not necessarily lead to immediate change of control or to liquidation of the firm's assets by its debtholders. To consider the impact of this on the valuation of corporate securities, we develop a model in which liquidation is driven by a state variable that accumulates with time and severity of distress. Recent or severe distress events may have greater impact on the liquidation trigger. Our model can be applied to a wide array of bankruptcy codes and jurisdictions.

Keywords: default, bankruptcy, liquidation trigger, debt pricing, distress threshold

JEL Classification: G12, G32, G33

Suggested Citation

Galai, Dan and Raviv, Alon and Wiener, Zvi, Liquidation Triggers and the Valuation of Equity and Debt (April 2003). EFA 2005 Moscow Meetings Paper. Available at SSRN: https://ssrn.com/abstract=402421 or http://dx.doi.org/10.2139/ssrn.402421

Dan Galai

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel
972 2 5883235 (Phone)
972 2 5881341 (Fax)

Alon Raviv (Contact Author)

Bar-Ilan University - Graduate School of Business Administration ( email )

The Graduate School of Business Administration
Ana and Max Web st
Ramat Gan
Israel

Zvi Wiener

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel
(972)-2-588-3049 (Phone)
(972)-2-588-3105 (Fax)

HOME PAGE: http://pluto.mscc.huji.ac.il/~mswiener/zvi.html

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