He wishes to thank the anonymous referee for useful comments that helped to improve the paper.
Valuation of the Firm's Liabilities When Equity Holders Are Also Creditors
Article first published online: 15 JUN 2007
Journal of Business Finance & Accounting
Volume 34, Issue 5-6, pages 950–975, June/July 2007
How to Cite
Realdon, M. (2007), Valuation of the Firm's Liabilities When Equity Holders Are Also Creditors. Journal of Business Finance & Accounting, 34: 950–975. doi: 10.1111/j.1468-5957.2007.02013.x
- Issue published online: 15 JUN 2007
- Article first published online: 15 JUN 2007
- (Paper received August 2005, revised version accepted October 2006. Online publication June 2007)
- equity holders's credit;
- debt repayment;
- assets liquidation;
- debt valuation;
- structural model
Abstract: 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.