Conference Agenda

Please note that all times are shown in the time zone of the conference. The current conference time is: 31st Oct 2024, 11:53:42pm CET

 
 
Session Overview
Session
CF 15: Debt, Financial Distress, and Bankruptcy
Time:
Saturday, 19/Aug/2023:
9:30am - 11:00am

Session Chair: Hongda Zhong, The University of Texas at Dallas
Location: 4A-33 (floor 4)


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Presentations
ID: 1992

Risk Aversion with Nothing to Lose

Stefano Pegoraro

University of Notre Dame, United States of America

Discussant: Mark Westerfield (University of Washington)

In a continuous-time game, a risk-neutral decision-maker chooses the volatility of a state variable, and a stopper terminates the game. I provide conditions under which the decision-maker becomes risk averse endogenously and minimizes volatility near termination, even if he faces myopic incentives to gamble for resurrection. The conditions introduce forward-looking incentives to preserve economic rents. I study two applications: a levered corporation and a mutual fund with uncertain productivity. When investors are about to default or withdraw their capital, managers attempt to preserve their rents by minimizing risk. Rents originate from current payoffs, growth opportunities, or managerial overconfidence.

EFA2023_1992_CF 15_1_Risk Aversion with Nothing to Lose.pdf


ID: 1057

Gambling for Redemption or Ripoff, and the Impact of Superpriority

Philip Dybvig1, Xinyu Hou2

1Washington University in St. Louis, United States of America; 2CERF Cambridge Judge Business School, United Kingdom

Discussant: Junyuan ZOU (INSEAD)

Myers (1977) described how firms can gamble using asset substitution, which is switching to a less efficient and more volatile project. Gambling using derivatives is a sharper instrument, allowing the owners to gamble just to what is needed, and with negligible efficiency loss. In our model, “gambling for redemption” operates at small scale and is socially beneficial, while “gambling for ripoff” operates at large scale and is socially inefficient but benefits firm owners (at the expense of bondholders). Superpriority laws grant Qualified Financial Contracts (QFCs) bankruptcy law exemptions, which make more funds available for gambling. This reduces firm value due to difficulty borrowing in the face of more gambling for ripoff.

EFA2023_1057_CF 15_2_Gambling for Redemption or Ripoff, and the Impact.pdf


ID: 128

Short-term debt overhang

Kostas Koufopoulos2, Giulio Trigilia1, Pavel Zryumov1

1University of York; 2University of Rochester

Discussant: Alvin Chen (Stockholm School of Economics / Swedish House of Finance)

We show that short-term debt in a firm’s optimal capital structure reduces investment under asymmetric information. Investors’ interpretation of underinvestment as a positive signal about the quality of the assets in place allows the equity holders to profit from short-term debt repricing at the rollover stage. Thus, underinvestment is more pronounced at shorter maturities, in contrast to Myers (1977). Low types’ incentives to mimic put an endogenous constraint on high types’ underinvestment payoff via a duration floor. Perhaps most strikingly, because cash lowers the duration floor, an increase in a firm’s retained earnings can decrease investment.

EFA2023_128_CF 15_3_Short-term debt overhang.pdf


 
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