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When Does Strategic Debt Service Matter?

Authors: Acharya, Viral V.
Huang, Huang
Subrahmanyam, Marti G.
Sundaram, Rangarajan K.
Issue Date: 2-May-2002
Series/Report no.: FIN-02-013
Abstract: Recent work has suggested that strategic under performance of debt service obligations by equity holders can resolve the gap between observed yield spreads and those generated Merton (41) style models. We show that it is not quite correct. The value of the option to under perform on debt-service obligations depend on two other optionality's available to equity holders, namely, the option to carry cash reserves within the firm and the option to raise new external financing.
Appears in Collections:Finance Working Papers

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