FRIC/Finance seminar with Alfred Lehar, Haskayne School of Business, University of Calgary

The Department of Finance and FRIC, Center for Financial Frictions, are proud to announce the upcoming seminar with Alfred Lehar, Haskayne School of Business, University of Calgary.

Alfred Lehar will present:

Restructuring Failure and Optimal Capital Structure

Authors:
Alfred Lehar
 

Abstract:
The ability of firms to successfully renegotiate their debt is a function of bankruptcy costs. Increasing bankruptcy costs reduce creditors’ payoff in bankruptcy court, increasing the incentive for debtholders to overcome frictions in the bargaining process and settle out of court. Since firms with high bankruptcy costs can restructure out of court, the bankruptcy costs are never realized in equilibrium and thus these firms take on more debt, contradicting the classical tradeoff theory. Embedding multilateral bargaining with frictions into a dynamic capital structure model I find that optimal leverage is u-shaped in bankruptcy costs. Firms with medium bankruptcy costs might find it ex-ante optimal to write covenants to commit to enter renegotiations early where renegotiations can still succeed. Firms with low bankruptcy costs will optimally have a concentrated debt structure while firms with high bankruptcy costs maximize ex-ante firm value with dispersed debt.

Location:
Solbjerg Plads 3,
2000 Frederiksberg
Room: SPs03