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

Realdon, Marco (2007) Valuation of the firm's liabilities when equity holders are also creditors. Journal of Business Finance & Accounting, 34, (506), 950-975. (doi:10.1111/j.1468-5957.2007.02013.x).


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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
Digital Object Identifier (DOI): doi:10.1111/j.1468-5957.2007.02013.x
ISSNs: 0306-686X (print)
Related URLs:
Subjects: H Social Sciences > HG Finance
H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
Divisions : University Structure - Pre August 2011 > School of Management
ePrint ID: 45630
Accepted Date and Publication Date:
June 2007Published
Date Deposited: 10 Jun 2008
Last Modified: 31 Mar 2016 12:20

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