Does Performance-Sensitive Debt mitigate Debt Overhang? | Bensoussan, Alain
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Does Performance-Sensitive Debt mitigate Debt Overhang?

in Journal of Economic Dynamics and Control, 131

Bensoussan, Alain ; Chevalier-Roignant, Benoit (1983-...) ; Rivera, Alejandro

Voir la revue «Journal of Economic Dynamics and Control»

We model the expansion decision of a levered firm. Straight debt distorts both timing and scaling: the firm invests less and later than its all-equity financed counterpart. The inclusion of performance sensitivity in the debt contract mitigates such distortions. Moreover, performance sensitivity is consistent with firm value maximization within a standard trade-off theory of capital structure. As a result, our model rationalizes the widespread use of performance sensitive debt (PSD), especially ... amongst fast growth firms.

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