Prof. Wolfgang Bühler from the University of Mannheim is giving a VGSF
research seminar on "Credit Risk, Liquidity Risk, and Optimal Capital
Structure under Incomplete Accounting Information" on WEDNESDAY, May 24th,
from 15:30 to 17:00 at the Institute for Advanced Studies (Institut für
Höhere Studien, Stumpergasse 56, 1060 Wien), Lecture Room (HS) 2. Please
find the paper's abstract below.
Coffee and snacks are going to be available in the cafeteria of IHS, which
is located next to the lecture room, before and after the seminar.
Information regarding the further schedule of the VGSF research seminar can
be found at
www.vgsf.ac.at!
Best,
Michael Halling
Abstract
In a structural model for credit risk we endogenize inability to pay as a
second independent reason for default besides overindebtedness. Inability to
pay is triggered by rational behavior of incompletely informed outsiders.
The firm needs to raise additional cash via secondary equity offerings in
order to service its coupon payments. Underpricing of secondary equity
offerings is explained as necessary for these offerings to be successful. In
addition to Duffie/Lando (2001) we find that the liquidity risk has a strong
impact on the current firm value and the optimal leverage. Credit spreads of
debt in the primary market depend on the degree of liquidity risk. They can
be lower or higher than in case without liquidity risk.
Our results have a number of additional, interesting consequences. Contrary
to Duffie/Lando (2001) incomplete information of outside investors has an
impact on the default probability of the firm and therefore on the optimal
capital structure which is determined in the primary market. The debt-equity
ratio is typically lower than in the Duffie/Lando (2001) model that operates
under complete information in the primary market and can result in lower
credit spreads.