Décamps, Jean-Paul and Villeneuve, Stéphane (2014) Rethinking Dynamic Capital Structure Models with Roll-Over Debt. Mathematical Finance, 24 (1). pp. 66-96.

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Identification Number : 10.1111/j.1467-9965.2012.00532.x


Dynamic capital structure models with roll-over debt rely on widely accepted
arguments that have never been formalized. This paper clarifies the literature and provides a rigorous formulation of the equity holders' decision problem within a game theory framework. We spell out the linkage between default policies in a rational expectations equilibrium and optimal stopping theory. We prove that there exists a unique equilibrium in constant barrier strategies, which coincides with that derived in the literature. Furthermore, that equilibrium is the unique equilibrium when the firm loses all its value at default time. Whether the result
holds when there is a recovery at default remains a conjecture.

Item Type: Article
Language: English
Date: January 2014
Refereed: Yes
Uncontrolled Keywords: strategic default, payoff dominant equilibrium, constrained optimal stopping time
JEL Classification: C61 - Optimization Techniques; Programming Models; Dynamic Analysis
G33 - Bankruptcy; Liquidation
Divisions: TSM Research (Toulouse), TSE-R (Toulouse)
Site: UT1
Date Deposited: 09 Jul 2014 17:22
Last Modified: 02 Apr 2021 15:47
OAI Identifier: oai:tse-fr.eu:25380
URI: https://publications.ut-capitole.fr/id/eprint/15174

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