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.
Data, as supplemental material, are available at <ext-link ext-link-type="uri" href="http://dx.doi.org/10.1287/mnsc.2014.1965">http://dx.doi.org/10.1287/mnsc.2014.1965</ext-link>.
This paper was accepted by Brad Barber, finance.
References
[1]
Auerbach A (2001) Taxation and corporate financial policy. NBER Working Paper 8203, National Bureau of Economic Research, Cambridge, MA.
[2]
Bates T, Kahle K, Stulz R (2009) Why do U.S. firms hold so much more cash than they used to? J. Finance 64:1985-2021.
[3]
Bortnick SD, Leska TJ (2009) Stimulus package: Buy back debt today, pay tax later. Pepper Hamilton LLP publication (February 18), http://www.pepperlaw.com/publications_update.aspx?ArticleKey=1396.
[4]
Brudney V (1992) Corporate bondholders and debtor opportunism: In bad times and good. Harvard Law Rev. 105:1821-1878.
[5]
Bulow J (1992) Debt and default: Corporate vs. sovereign. Newman P, Milgate M, Eatwell J, eds. New Palgrave Dictionary of Money and Finance (Palgrave Macmillan, Basingstoke, UK), 579-582.
[6]
Bulow J, Rogoff K (1991) Sovereign debt repurchases: No cure for overhang. Quart. J. Econom. 106:1219-1235.
[7]
Bulow J, Rogoff K, Dornbusch R (1988) The buyback boondoggle. Brookings Papers Econom. Activity 2:675-704.
[8]
Dasgupta S, Noe TH, Wang Z (2009) Where did all the dollars go? The effect of cash flow shocks on capital and asset structure. J. Financial Quant. Anal. 46:1259-1294.
[9]
DeAngelo H, DeAngelo L, Whited TM (2011) Capital structure dynamics and transitory debt. J. Financial Econom. 99(2):235-261.
[10]
Demont V (2009) Corporate and Securities Law Alert: How low bond trading prices can turn to an issuer's advantage-- Bond buy backs. Pepper Hamilton LLP (May 19), http://www.pepperlaw.com/publications_update.aspx?ArticleKey=1495.
[11]
Diamond and Dybvig (1983) Bank runs, deposit insurance, and liquidity. J. Political Econom. 91:401-419.
[12]
Faulkender M, Wang R (2006) Corporate financial policy and cash holdings. J. Finance 61:1957-1990.
[13]
Foley FC, Hartzell JC, Titman S, Twite G (2007) Why do firms hold so much cash? A tax-based explanation. J. Financial Econom. 86:579-607.
[14]
Froot K (1989) Buybacks, exit bonds, and the optimality of debt and equity relief. Internat. Econom. Rev. 30:49-70.
[15]
Gertner R, Scharfstein D (1991) A theory of workouts and the effects of reorganization law. J. Finance 46:1189-1222.
[16]
Goldstein R, Ju N, Leland H (2001) An EBIT-based model of dynamic capital structure. J. Bus. 74:483-512.
[17]
Hart O, Moore J (1998) Default and renegotiation: A dynamic model of debt. Quart. J. Econom. 113:1-41.
[18]
Hennessy C (2004) Tobin's Q, debt overhang, and investment. J. Finance 59:1717-1742.
[19]
Hugonnier JN, Malamud S, Morellec E (2011) Capital supply uncertainty, cash holdings, and investment. Working paper, Swiss Finance Institute, Ecole Polytechnique Fédérale de Lausanne, Lausanne, Switzerland.
[20]
James C (1996) Bank debt restructuring and the composition of exchange offers in financial distress. J. Finance 51:711-727.
[21]
Jensen MC, Meckling WH (1976) Theory of the firm: Managerial behavior, agency costs and ownership structure. J. Financial Econom. 3:305-360.
[22]
Kaplan M, Truesdell RD Jr (2008) Restructuring debt securities: Options and legal considerations. Newsletter (November), Davis Polk & Wardwell, New York.
[23]
King TD, Mauer DC (2000) Corporate call policy for nonconvertible bonds. J. Bus. 72:403-444.
[24]
Kruse T, Nohel T, Todd SK (2009) The decision to repurchase debt. Working paper, Loyola University, Chicago.
[25]
Leland HE (1994) Corporate debt value, bond covenants, and optimal capital structure. J. Finance 49:1213-1252.
[26]
LoPucki MM, Doherty JW (2011) Professional Fees in Corporate Bankruptcies: Data, Analysis, and Evaluation (Oxford University Press, New York).
[27]
Mann SV, Powers EA (2007) Determinants of bond tender premiums and the percentage tendered. J. Banking Finance 31:547-566.
[28]
Maxwell WF, Stephens CP (2003) The wealth effects of repurchases on bondholders. J. Finance 58:895-920.
[29]
Mella-Barral P, Perraudin W (1997) Strategic debt service. J. Finance 52:531-556.
[30]
Modigliani F, Miller M (1958) The cost of capital, corporation finance and the theory of investment. Amer. Econom. Rev. 48:261-297.
[31]
Morellec E, Nikolov B (2009) Cash holdings and competition. Working paper, Swiss Finance Institute, Ecole Polytechnique Fédérale de Lausanne, Lausanne, Switzerland.
[32]
Myers SC (1977) Determinants of corporate borrowing. J. Financial Econom. 5:147-175.
[33]
Ng S (2009) Firms move to scoop up own debt. Wall Street Journal (August 24), http://online.wsj.com/news/articles/SB125080949684547827.
[34]
Opler T, Pinkowitz L, Stulz R, Williamson R (1999) The determinants and implications of corporate cash holdings. J. Financial Econom. 52:3-46.
[35]
Riddick LA, Whited TM (2009) The corporate propensity to save. J. Finance 64:1729-1766.
[36]
Roberts M, Sufi A (2009) Renegotiation of financial contracts: Evidence from private credit agreements. J. Financial Econom. 93:159-184.
[37]
Shleifer A, Vishny RW (1986) Large shareholders and corporate control. J. Political Econom. 94:461-488.
[38]
Shuster GW Jr (2007) The Trust Indenture Act and international debt restructurings. Amer. Bankruptcy Inst. Law Rev. 14:431-467.
[39]
Smith C, Warner J (1979) On financial contracting: An analysis of bond covenants. J. Financial Econom. 7:117-161.
Index Terms
- Repurchasing Debt
Index terms have been assigned to the content through auto-classification.
Recommendations
Credit Default Swaps and Debt Overhang
We analyze the impact of credit default swaps (CDSs) trading on firm investment, long-term debt financing, and valuation. In our model, the firm is endowed with a real option to initiate a project and enhance its future growth. Its creditors have access ...
Sell-Side Debt Analysts and Debt Market Efficiency
We explore sell-side debt analysts’ contributions to the efficiency of securities markets. We document that debt returns lag equity returns less when debt research coverage exists, which is consistent with debt analysts facilitating the process by which ...
Government Debt Control: Optimal Currency Portfolio and Payments
Motivated by empirical facts, we develop a theoretical model for optimal currency government debt portfolio and debt payments, which allows both government debt aversion and jumps in the exchange rates. We obtain first a realistic stochastic ...
Comments
Information & Contributors
Information
Published In
Publisher
INFORMS
Linthicum, MD, United States
Publication History
Published: 01 July 2015
Accepted: 03 March 2014
Received: 17 October 2012
Author Tags
Qualifiers
- Article
Contributors
Other Metrics
Bibliometrics & Citations
Bibliometrics
Article Metrics
- 0Total Citations
- 0Total Downloads
- Downloads (Last 12 months)0
- Downloads (Last 6 weeks)0
Reflects downloads up to 30 Aug 2024
Other Metrics
Citations
View Options
View options
Get Access
Login options
Check if you have access through your login credentials or your institution to get full access on this article.
Sign in