37 Pages Posted: 25 Jan 2012 Last revised: 26 Dec 2019
Date Written: January 14, 2014
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.
Keywords: Savings, Debt Repurchase, Debt Overhang
JEL Classification: G32
Suggested Citation: Suggested Citation