Repurchasing debt

Research output: Contribution to journalArticle

2 Citations (Scopus)

Abstract

In this paper we build a theoretical model of a firm repurchasing its corporate debt. We find that firm creditors as a group sell debt to the firm only at face value. However, because of the cross-creditor externalities, buying back debt is cheaper and easier when there are many creditors, e.g., when debt is traded on the open market. We further show that repurchases contribute to flexibility in firms' capital structure and can increase ex ante firm value. The value of repurchases to the shareholders increases with the firm's ability to save cash and delay the repurchase.

Original languageEnglish (US)
Pages (from-to)1648-1662
Number of pages15
JournalManagement Science
Volume61
Issue number7
DOIs
StatePublished - Jul 1 2015

Fingerprint

Debt
Repurchase
Firm value
Corporate debt
Cash
Shareholders
Externalities
Capital structure

Keywords

  • Debt overhang
  • Debt repurchase
  • Savings

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research

Cite this

Repurchasing debt. / Mao, Lei; Tserlukevich, Yuri.

In: Management Science, Vol. 61, No. 7, 01.07.2015, p. 1648-1662.

Research output: Contribution to journalArticle

Mao, Lei ; Tserlukevich, Yuri. / Repurchasing debt. In: Management Science. 2015 ; Vol. 61, No. 7. pp. 1648-1662.
@article{7ade9bb2cacb438a91e62aef2ccae9fc,
title = "Repurchasing debt",
abstract = "In this paper we build a theoretical model of a firm repurchasing its corporate debt. We find that firm creditors as a group sell debt to the firm only at face value. However, because of the cross-creditor externalities, buying back debt is cheaper and easier when there are many creditors, e.g., when debt is traded on the open market. We further show that repurchases contribute to flexibility in firms' capital structure and can increase ex ante firm value. The value of repurchases to the shareholders increases with the firm's ability to save cash and delay the repurchase.",
keywords = "Debt overhang, Debt repurchase, Savings",
author = "Lei Mao and Yuri Tserlukevich",
year = "2015",
month = "7",
day = "1",
doi = "10.1287/mnsc.2014.1965",
language = "English (US)",
volume = "61",
pages = "1648--1662",
journal = "Management Science",
issn = "0025-1909",
publisher = "INFORMS Inst.for Operations Res.and the Management Sciences",
number = "7",

}

TY - JOUR

T1 - Repurchasing debt

AU - Mao, Lei

AU - Tserlukevich, Yuri

PY - 2015/7/1

Y1 - 2015/7/1

N2 - In this paper we build a theoretical model of a firm repurchasing its corporate debt. We find that firm creditors as a group sell debt to the firm only at face value. However, because of the cross-creditor externalities, buying back debt is cheaper and easier when there are many creditors, e.g., when debt is traded on the open market. We further show that repurchases contribute to flexibility in firms' capital structure and can increase ex ante firm value. The value of repurchases to the shareholders increases with the firm's ability to save cash and delay the repurchase.

AB - In this paper we build a theoretical model of a firm repurchasing its corporate debt. We find that firm creditors as a group sell debt to the firm only at face value. However, because of the cross-creditor externalities, buying back debt is cheaper and easier when there are many creditors, e.g., when debt is traded on the open market. We further show that repurchases contribute to flexibility in firms' capital structure and can increase ex ante firm value. The value of repurchases to the shareholders increases with the firm's ability to save cash and delay the repurchase.

KW - Debt overhang

KW - Debt repurchase

KW - Savings

UR - http://www.scopus.com/inward/record.url?scp=84936948828&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=84936948828&partnerID=8YFLogxK

U2 - 10.1287/mnsc.2014.1965

DO - 10.1287/mnsc.2014.1965

M3 - Article

AN - SCOPUS:84936948828

VL - 61

SP - 1648

EP - 1662

JO - Management Science

JF - Management Science

SN - 0025-1909

IS - 7

ER -