Debt Valuation, Renegotiations and Optimal Dividend Policy

Paine Webber Working Paper No. 99-05

Posted: 6 Oct 1999

See all articles by Hua Fan

Hua Fan

Goldman Sachs Group, Inc.

Suresh M. Sundaresan

Columbia University - Columbia Business School, Finance

Date Written: March 1999

Abstract

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 debtholders and equityholders 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. Bond covenants lead to more conservative dividend policies which benefit both claimants via lowered expected cost of liquidation. We derive optimal equity issuance and dividend policies. The debt capacity of the firm and the optimal capital structure are characterized.

JEL Classification: G32, G35

Suggested Citation

Fan, Hua and Sundaresan, Suresh M., Debt Valuation, Renegotiations and Optimal Dividend Policy (March 1999). Paine Webber Working Paper No. 99-05, Available at SSRN: https://ssrn.com/abstract=185610

Hua Fan

Goldman Sachs Group, Inc.

85 Broad Street
New York, NY 10004
United States

Suresh M. Sundaresan (Contact Author)

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
New York, NY 10027
United States
212-854-4423 (Phone)
212-316-9180 (Fax)

HOME PAGE: http://www0.gsb.columbia.edu/faculty/ssundaresan/

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