Dynamic capital structure with callable debt and debt renegotiations |
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| Affiliation: | 1. Dept. of Economics and Business, Aarhus University, Fuglesangs Allé 4, 8210 Aarhus V, Denmark;2. Dept. of Business and Economics, University of Southern Denmark, Campusvej 55, 5230 Odense M, Denmark;3. Dept. of Finance, Copenhagen Business School, Solbjerg Plads 3, 2000 Frederiksberg, Denmark;1. ETH, Zurich, Weinbergstr. 35, 8092 Zurich, Switzerland;2. CEPR, United Kingdom;3. CESifo, Germany;4. KPM, University of Bern, Schanzeneckstr. 1, 3001 Bern, Switzerland;1. Iowa State University, College of Business, Department of Finance, 3224 Gerdin Business Building, Ames, IA 50011, USA;2. Iowa State University, College of Business, Department of Finance, 3344 Gerdin Business Building, Ames, IA 50011, USA |
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| Abstract: | We consider a dynamic trade-off model of a firm's capital structure with debt renegotiation. Debt holders only accept restructuring offers from equity holders backed by threats which are in the equity holders' own interest to execute. Our model shows that in a complete information model in which taxes and bankruptcy costs are the only frictions, violations of the absolute priority rule (APR) are typically optimal. The size of the bankruptcy costs and the equity holders' bargaining power affect the size of APR violations, but they have only a minor impact on the choice of capital structure. |
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