This paper documents the fact that, when debtors decide to default on their obligations too early, it is in creditors' collective interest, as residual claimants, to make concessions prior to forcing a costly liquidation. Symmetrically, when debtors prefer to default at an inefficiently late...

In a market-based financial system, credit is held by dispersed creditors, and out-of-court renegotiation of debt is more likely to fail because of hold-out problems; in a bank-based system, out-of-court renegotiation stands good chances to succeed. Since out-of-court renegotiation is a...

When firms experience financial distress, equity-holders may act strategically, forcing concessions from debt-holders and paying less than the originally-contracted interest payments. This paper incorporates strategic debt service in a standard, continuous time asset pricing model, developing...