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Microeconomics Seminar: Conflicting priorities: a theory of covenants and collateral

Dates:
  • Tue 03 Dec 2019 13.30 - 15.00
  Add to Calendar 2019-12-03 13:30 2019-12-03 15:00 Europe/Paris Microeconomics Seminar: Conflicting priorities: a theory of covenants and collateral

Abstract:

Debt secured by collateral is repaid ahead of unsecured debt, even if taken in violation of covenants. We develop a model in which this priority leads to conflicts among debt contracts, but can be optimal nonetheless. Whereas creditors’ option to accelerate following covenant violations can deter dilution by new secured debt, preventing overinvestment, their option to waive covenants allows some dilution, preventing underinvestment. The optimal debt structure trades off over- and under-investment, blocking “bad” but not “good” dilution. It is multi-layered, including secured and unsecured debt with and without covenants. Our results are consistent with several debt structure regularities.

Co-authors: Jason Roderick Donaldson, Washington University in St. Louis and CEPR and Giorgia Piacentino, Columbia University, CEPR, and NBER

Seminar Room DD/MM/YYYY
  Seminar Room

Abstract:

Debt secured by collateral is repaid ahead of unsecured debt, even if taken in violation of covenants. We develop a model in which this priority leads to conflicts among debt contracts, but can be optimal nonetheless. Whereas creditors’ option to accelerate following covenant violations can deter dilution by new secured debt, preventing overinvestment, their option to waive covenants allows some dilution, preventing underinvestment. The optimal debt structure trades off over- and under-investment, blocking “bad” but not “good” dilution. It is multi-layered, including secured and unsecured debt with and without covenants. Our results are consistent with several debt structure regularities.

Co-authors: Jason Roderick Donaldson, Washington University in St. Louis and CEPR and Giorgia Piacentino, Columbia University, CEPR, and NBER


Location:
Seminar Room

Affiliation:
Department of Economics

Type:
Seminar series

Speaker:
Prof. Denis Gromb (HEC Paris)
 
 

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