Abstract
In this paper, we develop a continuous-time model of strategic debt service (SDS, henceforth) with positive externalities, and examine the impact of positive externalities on investment and financing polices. A key novel feature in our model is that the creditors only receive debt restructuring offers, which must be also beneficial to them, provided by the shareholders. In contrast to SDS with negative externalities, we find that the SDS with positive externalities accelerates investment and delays restructuring. Furthermore, the SDS with positive externalities increases firms’ value and gives firms an incentive to issue more debt in capital structure.
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