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Strategic defaults and priority violations under costly state verification

Hvide, Hans K.; Leite, Tore
Working paper
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URI
http://hdl.handle.net/11250/163701
Date
2002-06
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  • Discussion papers (FOR) [556]
Abstract
We reformulate the classic CSV model of financial contracting from Townsend (1979) and Gale & Hellwig (1985) to tackle criticisms raised against it, such as lack of subgame-perfectness at the repayment stage and its inability to encompass equity contracts. The implications drawn are shown to be consistent with empirical regularities, such as strategic defaults of debt obligations, firms being financed by a mix of debt and equity, violations of absolute priority rules, and a low debt ratio for high risk projects.
Publisher
Norwegian School of Economics and Business Administration. Department of Finance and Management Science
Series
Discussion paper
2002:7

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