Extending the Maturity of a Defaulting Debt — The Longstaff Model Revisited

This paper uses differing objective functions under the Longstaff model (1990) to discuss the strategic choices faced by the creditor when deciding whether to grant maturity extension on a defaulted loan. The results reveal that: (1) it ensures that the return per unit of risk is higher after maturi...

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Bibliographic Details
Published in:Review of Pacific basin financial markets and policies 2009-03, Vol.12 (1), p.125-140
Main Authors: Lee, Shyan Yuan, Chung, Yi Fang
Format: Article
Language:English
Subjects:
Debt management
Default
Defaulting debt
Financial engineering
JEL Classification: G33
JEL Classification: GG13
liquidation cost
Loan losses
Maturity
maturity extension decisions
optimal extension period
Portfolio management
Sharpe ratio
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Summary:This paper uses differing objective functions under the Longstaff model (1990) to discuss the strategic choices faced by the creditor when deciding whether to grant maturity extension on a defaulted loan. The results reveal that: (1) it ensures that the return per unit of risk is higher after maturity extension than before; (2) it recognizes that the risk profile of the firm substantially affects the strategic behavior of the creditor; and (3) it demonstrates that the higher the profit sharing percentage the creditor get, the more willing it will be to extend maturity.
ISSN:0219-0915
1793-6705
1793-6705
DOI:10.1142/S0219091509001575