Inside debt renegotiation: Optimal debt reduction,timing, and the number of rounds |
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| Affiliation: | 1. Department of Finance and Business Economics, Foster School of Business, University of Washington, Seattle, WA 98195-3200, USA;2. Department of Finance and Business Economics, Department of Information Systems and Operations Management, Department of Statistics, Foster School of Business, University of Washington, Seattle, WA 98195-3200, USA;1. Finance Department, NEOMA Business School, Rouen Campus, France;2. Finance Department, ESSEC Business School, Avenue Bernard Hirsch, B.P. 50105, 95021 Cergy-Pontoise Cedex, France;1. Graduate School of Social Sciences, Tokyo Metropolitan University, 1-1 Minami-osawa, Hachioji, Tokyo 192-0397, Japan;2. Graduate School of Economics, Osaka University, 1-7 Machikaneyama, Toyonaka, Osaka 560-0043, Japan;3. Swiss Finance Institute, École Polytechnique Fédérale de Lausanne, 1015 Lausanne, Switzerland |
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| Abstract: | This paper develops a model of debt renegotiation in a structural framework that accounts for taxes, bankruptcy costs and renegotiation costs. To our knowledge, all the previous work on debt renegotiation implies an infinite number of renegotiations. This feature preempts the analysis of the optimal number of renegotiations. We address this drawback by incorporating fixed renegotiation costs in a model of multiple renegotiations, hence obtaining a small finite number of renegotiations. Simple analytical formulae are derived for debt and equity, as well as implicit formulae for the coupon reduction, as a result of a backward recursive technique. The results show that the optimal number of renegotiations, the size and the dynamics of the coupon reductions depend critically on the bargaining power of the claimants. Testable empirical implications regarding multiple costly renegotiations are drawn. |
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