Debt financing under asymmetric information
Article Abstract:
We analyze the optimal design of debt maturity, coupon payments, and dividend payout restrictions under asymmetric information. We show that, if the asymmetry of information is concentrated around long-term cash flows, firms finance with coupon-bearing long-term debt that partially restricts dividend payments. If the asymmetry of information is concentrated around near-term cash flows and there exists considerable refinancing risk, firms finance with coupon-bearing long-term debt that does not restrict divident payments. Finally, if the asymmetry of information is uniformly distributed across dates, firms finance with short-term debt. (Reprinted by permission of the publisher.)
Publication Name: Journal of Finance
Subject: Business
ISSN: 0022-1082
Year: 1995
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Strategic debt service
Article Abstract:
When firms experience financial distress, equity holders may act strategically, forcing concessions from debtholders and paying less than the originally-contracted interest payments. This article incorporates strategic debt service in a standard, continuous time asset pricing model, developing simple closed-form expressions for debt and equity values. We find that strategic debt service can account for a substantial proportion of the premium on risky corporate debt. We analyze the efficiency implications of strategic debt service, showing that it can eliminate both direct bankruptcy costs and agency costs of debt. (Reprinted by permission of the publisher.)
Publication Name: Journal of Finance
Subject: Business
ISSN: 0022-1082
Year: 1997
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