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Repurchasing debt
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Mao, Lei and Tserlukevich, Yuri (2015) Repurchasing debt. Management Science, 61 (7). pp. 1648-1662. doi:10.1287/mnsc.2014.1965 ISSN 0025-1909.
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Official URL: http://dx.doi.org/10.1287/mnsc.2014.1965
Abstract
In this paper we build a theoretical model of corporate debt repurchases. First, we find that the firm that buys back its own debt from a creditor must pay a premium over the price at which the same creditor is willing to trade with third parties. This is because the repurchase by a firm leads to a dollar-for-dollar reduction in the amount of cash or assets available to pay the remaining debt. Second, the repurchase price is lower when there are multiple bondholders because of cross-creditor externalities. Therefore, we challenge the view that restructuring more dispersed debt is always more costly to implement. Third, when bankruptcy costs are significant, there is a range of prices below face value at which debt can be repurchased. Fourth, we show that repurchases contribute to flexibility in firms capital structure and increase ex-ante firm value, but have limited power to mitigate debt overhang.
| Item Type: | Journal Article | ||||||||
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| Subjects: | H Social Sciences > HB Economic Theory H Social Sciences > HG Finance |
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| Divisions: | Faculty of Social Sciences > Warwick Business School | ||||||||
| Library of Congress Subject Headings (LCSH): | Economics -- Mathematical models, Debt, Debtor and creditor , Corporations -- Finance, Debt financing (Corporations) | ||||||||
| Series Name: | WBS Working Paper | ||||||||
| Journal or Publication Title: | Management Science | ||||||||
| Publisher: | Institute for Operations Research and the Management Sciences (I N F O R M S) | ||||||||
| Place of Publication: | Coventry, UK | ||||||||
| ISSN: | 0025-1909 | ||||||||
| Official Date: | July 2015 | ||||||||
| Dates: |
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| Volume: | 61 | ||||||||
| Number: | 7 | ||||||||
| Number of Pages: | 37 | ||||||||
| Page Range: | pp. 1648-1662 | ||||||||
| DOI: | 10.1287/mnsc.2014.1965 | ||||||||
| Status: | Peer Reviewed | ||||||||
| Publication Status: | Published | ||||||||
| Access rights to Published version: | Restricted or Subscription Access | ||||||||
| Adapted As: |
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