Using an innovative random regime shift detection methodology, we identify and confirm two distinct regime types in the dynamics of credit spreads: a level regime and a volatility regime. The level regime is long lived and shown to be linked to Federal Reserve policy and credit market...

In a one-period setting Green (1984) demonstrates that convertible debt perfectly mitigates the asset substitution problem by curbing shareholders’ incentive to increase risk. This is because claimholders design the capital structure precisely when the risk-shifting opportunity is available....

Leaders of loan syndicates often delegate some administrative tasks to banks known as co-agents. One reason is that co-agents are specialized banks that help split the costs of managing the syndicate. Another reason is that co-agents monitor the leader on behalf of syndicate members to mitigate...

Given equity's convex payoff function, shareholders can transfer wealth from bondholders by increasing firm risk. We test the existing hypothesis that convertible debt reduces this classical agency problem of risk-shifting. First, we derive a measure of shareholders' risk incentives induced by...

We extend the contingent claims framework for the levered firm in explicitly modelling the resolution of financial distress under formal bankruptcy as a non-cooperative game between claimants under the supervision of the bankruptcy judge. The identity of the class of claimants proposing the...

This paper studies the contracting choices between an entrepreneur and venture capital investors in a portfolio context. We rely on the mean-variance framework and derive the optimal choices for an entrepreneur with and without the presence of different kinds of venture capitalists. In...

We develop a contingent claims model of a firm in financial distress with a formal account for renegotiations under the Chapter 11 bankruptcy procedure. Shareholders and two classes of creditors (senior and junior) alternatively propose a reorganization plan subject to a vote. The bankruptcy...