Repeated dilution of diffusely held debt

Debt with many creditors is analyzed in a continuous-time pricing model of the levered firm in the presence of corporate taxes. We specifically allow for debtor opportunism in form of repeated strategic renegotiation offers and default threats. Dispersed creditors will only accept coupon concessions in exchange for guaranteed liquidation rights, e.g. collateral. The ex ante optimal debt contract is secured with assets which gradually become worthless as the firm approaches the preferred liquidation conditions, in order to allow for sufficient, but delayed renegotiability. Compared with single creditor debt, dispersed debt offers a larger debt capacity, and it is preferable ex-ante if the value of collateralizable assets is then reduced. Our model can explain credit risk premia in excess of those supported by a single creditor model with opportunistic renegotiation.debt reorganization; multiple creditors; priority of claims; debt pricing

Corporate walkout decisions and the value of default

We present a continuous-time asset pricing model of the levered firm where shareholders select not only the timing but also the form of control transfers. Owners are allowed to walk out of the firm either by (i) defaulting on their debt obligations or (ii) selling the firm with its debt obligations, as in a corporation sale. The structural model relates shareholders' ex-post choice to both technological and financial factors. We obtain that the likelihood of default being chosen instead of a corporation sale increases with (i) the degree of leverage displayed by the firm and (ii) its technological supremacy in the industry. Moreover, whereas default necessarily involves inefficient timing of ownership transfers, corporation sales eliminate agency costs and achieve the correct allocation of resources. By ignoring such direct sales of ownership rights, existing defaultable bond pricing models thus often exaggerate risk premia and underestimate the borrowing ability (debt capacity) of firms

Default risk in asset pricing

This paper provides an analytical solution for the impact of default risk on the valuation of realistically intricate claims on time dependent uncertain income streams. Its modular structure allows us to adjust the set of assumptions concerning the event of default to the specificity of the environment which surrounds the asset. The importance of such a flexibility is illustrated in the context of corporate debt, examining the simplest case of finite lived coupon paying corporate bonds with principal repayment at maturity. The magnitude of risk premia, as well as the term structure of credit spreads, are not surprisingly largely determined by the assumed default scenario

Collateral, Renegotiation and the Value of Diffusely Held Debt

Debt with many creditors is analyzed in a continuous-time pricing model of the levered firm. We specifically allow for debtor opportunism vis-a-vis a non-coordinated group of creditors, in form of repeated strategic renegotiation offers and default threats. We show that the creditors' initial entitlement to non-collateralized assets will be expropriated through exchange offers. Exchange offers successively increase the level of collateral until all assets are fully collateralized. The ex ante optimal debt contract is neither fully collateralized nor without any collateral. Diffusely held debt allows for a larger debt capacity and bears lower credit risk premia than privately held debt. We derive simple closed-form solutions for the value of equity and defaultable bonds. Numerical estimates show that the bond valuation is very sensitive to the correct specification of the debt renegotiation model.

Reorganization Law and Dilution Threats in Different Financial Systems

In a market-based financial system, credit is held by dispersed creditors, and out-of-court renegotiation of debt is more likely to fail because of hold-out problems; in a bank-based system, out-of-court renegotiation stands good chances to succeed. Since out-of-court renegotiation is a substitute for court-supervised reorganization, the design of a reorganization law cannot abstract from the financial system. Chapter 11-style renegotiation is shown to benefit public debt firms and to be harmful for private debt firms; the overall effect depends on the financial system, but is likely to be positive only in a market-based system. The case for a reorganization law is weakened if dilution threats like exit consents are taken into account: such a law is then in most cases undesirable. Legislation, however, which jointly introduces a reorganization law while facilitating the use of dilution threats will improve welfare in a market-based system, but reduce welfare in a bank-based system. Thus, the paper indentifies a new determinant in the debate over optimal bankruptcy codes, which is how easily dilution threats can be deployed.Workouts;reorganization law;Chapter 11;financial systems;dilution threats;exit consents;hold-in effect

Collateral, Renegotiation and the Value of Diffusely Held Debt

Debt with many creditors is analyzed in a continuous-time pricing model of the levered firm. We specifically allow for debtor opportunism vis-a-vis a non-coordinated group of creditors, in form of repeated strategic renegotiation offers and default threats. We show that the creditors' initial entitlement to non-collateralized assets will be expropriated through exchange offers. Exchange offers successively increase the level of collateral until all assets are fully collateralized. The ex ante optimal debt contract is neither fully collateralized nor without any collateral. Diffusely held debt allows for a larger debt capacity and bears lower credit risk premia than privately held debt. We derive simple closed-form solutions for the value of equity and defaultable bonds. Numerical estimates show that the bond valuation is very sensitive to the correct specification of the debt renegotiation model.Debt reorganization;multiple creditors

Entrepreneurial Spawning and Firm Characteristics

We analyze the implications of entrepreneurial spawning for a variety of firm characteristics such as size, focus, profitability, and innovativeness. We examine the dynamics of spawning over time. Our model accounts for much of the empirical evidence relating to the relation between spawning and firm characteristics. Firms that have higher patent quality spawn more, as do firms that have higher knowhow. Older firms spawn less, they are more diversified and less profitable. Spawning frequency, focus, and profitability are positively related where spawning is driven by the value of organizational fit; they are negatively related with firm size

Structure and energetics of ammonia clusters (NH3)n (n=3-20) investigated using a rigid-polarizable model derived from ab initio calculations

An analytical model has been developed to describe the interaction between rigid ammonia molecules including the explicit description of induction. The parameters of the model potential were chosen by fitting high quality ab initio data obtained using second-order Moller-Plesset (MP2) perturbation theory and extended basis sets. The description of polarization effects is introduced by using a noniterative form of the "charge on spring model", the latter accounting for more than 95% of the dipole induction energy and of the increased molecular dipole. Putative global minima for (NH3)(n) (n = 3-20) have been optimized using this new model, the structure and energetics of the clusters with n = 3-5 being found in good agreement with previous ab initio results including electronic correlation. Results for larger species have been compared with previous structural studies where only nonpolarizable models were employed. Our model predicts larger binding energies for any cluster size than previous analytical surfaces, the results often suggesting a reorganization of the relative energy ranking and a different structure for the global minimum

The Role of Knowhow Acquisition in the Formation and Duration of Joint Ventures

We analyze the role of knowhow acquisition in the formation and duration of joint ventures. Two parties become partners in a joint venture to benefit from each other’s knowhow. Joint operations provide each party with the opportunity to acquire part of its partner’s knowhow. A party’s increased knowhow provides the impetus for the dissolution of the joint venture. We characterize the conditions under which dissolution takes place, identify the party that buys out its partner, determine the time to dissolution, establish its comparative statics, and examine the implications of knowledge acquisition for the desirability of joint venture formation