Dynamic Capital Structure with Callable Debt and Debt Renegotiations
- Publication date
- Publisher
- 2014
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