Debt valuation, renegotiation, and optimal dividend policy |
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Authors: | Fan, H Sundaresan, SM |
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Affiliation: | 1 Columbia University and Goldman Sachs 2 811 Uris Hall, 3022 Broadway, Graduate School of Business, Columbia University, New York, NY 10027, USA z Corresponding author E-mail: ms122@columbia.edu |
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Abstract: | The valuation of debt and equity, reorganization boundaries,and firm's optimal dividend policies are studied in a frameworkwhere we model strategic interactions between debt holders andequity holders in a game-theoretic setting which can accommodatevarying bargaining powers to the two claimants. Two formulationsof reorganization are presented: debt-equity swaps and strategicdebt service resulting from negotiated debt service reductions.We study the effects of bond covenants on payout policies anddistinguish liquidity-induced defaults from strategic defaults.We derive optimal equity issuance and payout policies. The debtcapacity of the firm and the optimal capital structure are characterized. |
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