Why adding firm value with a put feature in debt contracts is better than renegotiation |
| |
Authors: | Christian Koziol |
| |
Institution: | (1) University of Hohenheim, 70593 Stuttgart, Germany |
| |
Abstract: | In this paper, we analyze the ability of putable debt to add firm value. To stress the impact of a put feature, we compare
the resulting optimal firm values and capital structures to those of a firm with straight debt that can be renegotiated. For
this purpose, we consider a time-independent firm value model with tax-deductibility of coupon payments, bankruptcy costs
in the case of a default, and dynamic restructuring. We find that a put right can always be designed so that a put is enforced
for low asset values but the bond remains alive for high asset values. The optimal firm value arising from this type of equilibrium
strategy is remarkable for several reasons: The optimal firm value under putable debt is always higher than under straight
debt even under renegotiation with arbitrary negotiation power of debt and equity holders. Moreover, the optimal firm value
under putable debt always benefits from higher bankruptcy costs, while the optimal firm value under straight debt suffers.
Accordingly, a higher volatility of asset value returns can be favorable for a high firm value under putable debt, while it
always destroys value of a firm with straight debt. |
| |
Keywords: | |
本文献已被 SpringerLink 等数据库收录! |
|