Abstract
AbstractThis paper develops a debt renegotiation model with positive externalities using the Nash bargaining game and explores dynamic optimal downward debt restructuring policies in times of financial distress. We derive closed‐form expressions for the optimal restructuring policies. Moreover, we provide theoretical support for the advantages of debt renegotiation with positive externalities. In addition, our model could explain the violation of the absolute priority rule for firms in financial distress. Finally, we find that debt renegotiation is facilitated among firms with relatively low risk and a high leverage ratio, as documented by empirical evidence.
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