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Design and valuation of debt contracts

Hua Fan, 2000
Faculty Advisor: Suresh Sundaresan


In this thesis, I develop a corporate debt valuation model that explicitly considers the strategic interactions between equity holders and debt holders upon debt renegotiation. Two formulations of reorganization are presented: debt-equity swaps and strategic debt service resulting from negotiated debt service reductions. The model is also general enough to include the valuation of various contractual features of corporate debt contracts: the cash flow based bond covenant, the subordinated debt with or without cross default provision, and the secured debt contract. I also study how a firm's operational policies vary with bond covenants in place. Certain bond covenants may lead to more conservative dividend policies and conservative choice of risk levels, which in turn benefit both the equity and debt holders via lowered expected cost of liquidation. In this study, the debt borrowing limit of the firm and the optimal capital structure are also discussed. Furthermore, I formulate a general setup of the security design problem: which type of security should a firm choose to finance a new investment? I show that the use of a secured debt contract offers a way to reach firm's optimal capital structure since it decreases the potential liquidation cost and therefore reduces the cost of borrowing. In addition, the issuance of secured debt contract also increases the debt borrowing limit and alleviates the conflicts between debt-equity holders on investment decision.

Doctoral Program News

Honigsberg featured in Ideas at Work

The August issue of Ideas at Work features research that doctoral candidate Colleen Honigsberg led in conjunction with Sharon Katz.

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Wazlawek featured in Ideas at Work

Abbie Wazlawek's joint research with Professor Daniel Ames is featured in the June 24th, 2014 edition of Ideas at Work

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Ethan Rouen featured in Ideas at Work

Ethan Rouen's joint research with Professor Dan Amiram is featured in the May 15th, 2014 edition of Ideas at Work

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Rivas Wins Fellowship

The PhD program is proud to congratulate Miguel Duro Rivas, who was awarded the Nasdaq Educational Foundation Doctoral Dissertation Fellowship.

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Wong wins Deloitte Fellowship

We are proud to announce that Yu Ting (Forester) Wong is one of the recipients of the 2014 Deloitte Foundation Doctoral Fellowship in Accounting.

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The PhD Program Congratulates John Yao

PhD student John Yao was a finalist in the 2013 M&SOM (Manufacturing & Service Operations Management) student paper competition.

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Honigsberg Named Postdoctoral Fellow

The PhD program is proud to congratulate Colleen Honigsberg, who was named the Postdoctoral Fellow in Corporate Governance at the Millstein Center at Columbia Law School in October 2013

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