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Valuation of the firm's liabilities when equity holders are also creditors

Realdon, M. (2007) Valuation of the firm's liabilities when equity holders are also creditors. Journal of Business Finance and Accounting, 34 (5-6). pp. 950-975. ISSN 0306-686X

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Abstract

This paper presents a tractable structural model whereby controlling equity holders are also among the creditors of the firm. As the firm approaches distress, equity holders can drain the assets of the firm and expropriate other creditors by repaying their credit before bankruptcy. The right of the bankruptcy court to revoke such repayment protects arm's length creditors, reduces the cost of borrowing and induces equity holders to anticipate repayment of their credit. Equity holders decide repayment neither too early nor too late, so as to reduce the risk of repayment revocation by the bankruptcy court. Similar conclusions apply to the preferential repayment of bank loans personally guaranteed by equity holders. The analysis also suggests that callable bearer bonds may be more valuable to equity holders than to other creditors.

Item Type: Article
Institution: The University of York
Academic Units: The University of York > Economics and Related Studies (York)
Depositing User: York RAE Import
Date Deposited: 07 May 2009 13:45
Last Modified: 07 May 2009 13:45
Published Version: http://dx.doi.org/10.1111/j.1468-5957.2007.02013.x
Status: Published
Publisher: Blackwell Publishing
Identification Number: 10.1111/j.1468-5957.2007.02013.x
URI: http://eprints.whiterose.ac.uk/id/eprint/6504

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