Seminar with Johann Reindl, Vienna Graduate School of Finance (VGSF)

Upcoming Finance Seminar with Johann Reindl, Vienna Graduate School of Finance (VGSF)

 
Thursday, December 20, 2012 - 11:00 to 12:15

Upcoming Finance Seminar with Johann Reindl, Vienna Graduate School of Finance (VGSF)

Title: Deleveraging Via Asset Sales: Agency Costs, Taxes, and Government Policies

Abstract

Do equityholders of a financially distressed firm have an incentive to sell assets and buy back debt to achieve a more sustainable leverage ratio and avoid costly bankruptcy? I develop a dynamic structural model incorporating a dynamic game to determine conditions under which a firm would voluntarily do so. It allows me to assess the impact of debt overhang and asset substitutionon the restructuring condition and the holdout problem. I find that as long as the total firm value increases through the debt repurchase, equityholders benefit from it, as well. In a dynamic setting, the debt overhang problem takes the form of too early restructuring. Taxes on cancellation of debt income and government subsidies to debtholders can destroy equityholders’ incentives; so does low liquidity in the market for the firm’s assets; an asset purchase program fosters them. Finally, via threatening not to tender, debtholders can appropriate a large share of the firm’s restructuring gains. However, they cannot stop equityholders from gambling for resurrection which in turn gives equityholders bargaining power to prevent debtholders from holding out.

The page was last edited by: Department of Finance // 04/15/2013