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  • July 2019
  • Article
  • Journal of Financial Economics

Optimal Capital Structure and Bankruptcy Choice: Dynamic Bargaining vs Liquidation

By: Samuel Antill and Steven R. Grenadier
  • Format:Print
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Abstract

We model a firm’s optimal capital structure decision in a framework in which it may later choose to enter either Chapter 11 reorganization or Chapter 7 liquidation. Creditors anticipate equityholders’ ex-post reorganization incentives and price them into the ex-ante credit spreads. Using a realistic dynamic bargaining model of reorganization, we show that the off-equilibrium threat of costly renegotiation can lead to lower leverage, even with liquidation in equilibrium. If reorganization is less efficient than liquidation, the added option of reorganization can actually make equityholders worse off ex-ante, even when they liquidate on the equilibrium path.

Keywords

Default; Dynamic Bargaining; Capital Structure; Insolvency and Bankruptcy; Mathematical Methods

Citation

Antill, Samuel, and Steven R. Grenadier. "Optimal Capital Structure and Bankruptcy Choice: Dynamic Bargaining vs Liquidation." Journal of Financial Economics 133, no. 1 (July 2019): 198–224.
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About The Author

Samuel B. Antill

Finance
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