Debt Valuation, Renegotiation, and Optimal Dividend Policy

Hua Fan; Suresh Sundaresan

doi:10.1093/rfs/13.4.1057

Debt Valuation, Renegotiation, and Optimal Dividend Policy

Hua Fan¹; Suresh Sundaresan^2,3,4

¹ Goldman Sachs (United States) · ² Columbia International University · ³ University of Missouri · ⁴ Columbia University

Review of Financial Studies 2000

The valuation of debt and equity, reorganization boundaries, and firm's optimal dividend policies are studied in a framework where we model strategic interactions between debt holders and equity holders in a game-theoretic setting which can accommodate varying bargaining powers to the two claimants. Two formulations of reorganization are presented: debt-equity swaps and strategic debt service resulting from negotiated debt service reductions. We study the effects of bond covenants on payout policies and distinguish liquidity-induced defaults from strategic defaults. We derive optimal equity issuance and payout policies. The debt capacity of the firm and the optimal capital structure are characterized.

DOI: 10.1093/rfs/13.4.1057
Volume: 13 (4)
Pages: 1057-1099
Language: en
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Sources: crossref openalex