Open AccessFINANCING AND INVESTMENT STRATEGIES UNDER CREDITOR-MAXIMIZED LIQUIDATION
Author(s) -
Takashi Sawada,
Michi Nishihara
Publication year - 2021
Publication title -
international journal of theoretical and applied finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.469
H-Index - 35
eISSN - 1793-6322
pISSN - 0219-0249
DOI - 10.1142/s0219024921500138
Subject(s) - creditor , debt , investment (military) , business , equity value , equity (law) , equity financing , finance , monetary economics , value (mathematics) , debt financing , financial system , economics , internal debt , debt levels and flows , machine learning , politics , political science , computer science , law
We develop a contingent claim model to examine the interaction between financing and investment where equity holders decide when to default and debt holders decide when to liquidate as well as maximize the liquidation value. We show that if the debt holders maximize the residual value at liquidation, an increase in liquidation value increases the amount of debt issuance and investment quantity ex ante, delaying corporate investment. This relationship is based on the fact that an increase in the liquidation value decreases the credit spread of debt holders. These results fit well with those of existing empirical studies.