Repurchasing Debt

In this paper we build a theoretical model of a firm repurchasing its corporate debt. We find that firm creditors as a group sell debt to the firm only at face value. However, because of the cross-creditor externalities, buying back debt is cheaper and easier when there are many creditors, e.g., whe...

Full description

Saved in:
Bibliographic Details
Published in:Management science 2015-07, Vol.61 (7), p.1648-1662
Main Authors: Mao, Lei, Tserlukevich, Yuri
Format: Article
Language:English
Subjects:
Analysis
Capital structure
Corporate debt
Creditors
Debt
Debt financing (Corporations)
debt overhang
debt repurchase
Flexibility
Insolvency
Repurchase
savings
Stock redemption
Stockholders
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:In this paper we build a theoretical model of a firm repurchasing its corporate debt. We find that firm creditors as a group sell debt to the firm only at face value. However, because of the cross-creditor externalities, buying back debt is cheaper and easier when there are many creditors, e.g., when debt is traded on the open market. We further show that repurchases contribute to flexibility in firms' capital structure and can increase ex ante firm value. The value of repurchases to the shareholders increases with the firm's ability to save cash and delay the repurchase. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2014.1965 . This paper was accepted by Brad Barber, finance.
ISSN:0025-1909
1526-5501
DOI:10.1287/mnsc.2014.1965