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| Author: | Heinkel, R. Zechner, J. |
| Title: | Financial Distress and Optimal Capital Structure Adjustments |
| Journal: | Journal of Economics & Management Strategy
1993 : WINTER, VOL. 2:4, p. 531-565 |
| Index terms: | CAPITAL STRUCTURE OF COMPANIES DEBT |
| Language: | eng |
| Abstract: | We show that asymmetric information may prevent firms with pure discount bonds from renegotiating their capital structure prior to the maturity of the debt, although this would increase the value of the firm when its procpects are poor. This inefficiency can be reduced if the firm issues debt with a risky intermediate debt payment, such as a coupon or a sinking fund payment. We also demonstrate that bankruptcy institutions leading to deviations from absolute priority can improve the timing of recapitalizations by financially distressed firms. Finally, we show that, under certain conditions, the optimal capital structure adjustment during financial distress consists of a convertible debt-for-straight debt swap |
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