Download as iCal file
Denis Gromb - HEC Paris
Monday 08 October 2018, 04:30pm - 06:00pm

Conflicting Priorities: A Theory of Collateral and Covenants (joint with Jason Donaldson and Giorgia Piacentino )

Abstract:

Debt secured by collateral has absolute priority in the event of default - it is paid ahead of unsecured debt, even if unsecured debt is protected by negative pledge covenants prohibiting new secured debt. We develop a model of how this priority rule leads to conflicts among creditors. But we find that it can be optimal: borrowers’ option to use collateral in violation of covenants allows for the dilution of existing debt, and hence prevents underinvestment, whereas creditors’ option to accelerate debt following a covenant violation deters dilution, and hence prevents over-investment. The optimal outcome is implementable via a mix of different types of debt, including secured and unsecured debt with tight and loose covenants. The model explains some  stylized facts about debt structure, covenants, and their violations.

 

   
PERSONE
RICERCA
TEACHING
EVENTI
© EIEF Copyright 2023