Does Performance-Sensitive Debt Mitigate Debt Overhang?

50 Pages Posted: 15 Jan 2020 Last revised: 20 May 2021

See all articles by Alain Bensoussan

Alain Bensoussan

University of Texas at Dallas - Naveen Jindal School of Management; Hong Kong Polytechnic University - Faculty of Business; Ajou University

Benoit Chevalier-Roignant

Cranfield School of Management

Alejandro Rivera

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Date Written: December 24, 2019

Abstract

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.

Keywords: Performance-Sensitive Debt, Real Options, Debt Overhang, Capital Structure

JEL Classification: G30

Suggested Citation

Bensoussan, Alain and Chevalier-Roignant, Benoit and Rivera, Alejandro, Does Performance-Sensitive Debt Mitigate Debt Overhang? (December 24, 2019). Available at SSRN: https://ssrn.com/abstract=3509880 or http://dx.doi.org/10.2139/ssrn.3509880

Alain Bensoussan

University of Texas at Dallas - Naveen Jindal School of Management ( email )

800 West Campbell Rd
SM 30
Richardson, TX 75080-3021
United States
9728836117 (Phone)

HOME PAGE: http://www.utdallas.edu/~axb046100/

Hong Kong Polytechnic University - Faculty of Business

Dept SEEM
Systems Engr * Engr Mgmt
Hong Kong, Hong Kong
China

Ajou University ( email )

Ajou
France

Benoit Chevalier-Roignant

Cranfield School of Management ( email )

Cranfield
Bedfordshire MK43 OAL, MK43 0AL
United Kingdom

Alejandro Rivera (Contact Author)

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

HOME PAGE: http://jindal.utdallas.edu/faculty/alejandro-rivera

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