No Access

Extending the Maturity of a Defaulting Debt — The Longstaff Model Revisited

Department of Finance, National Taiwan University, No. 1, Sec. 4, Roosevelt Road, Da-an District, Taipei City 106, Taiwan

Search for more papers by this author

and

Yi Fang Chung

Department of Finance, National Taiwan University, Taiwan

Department of Finance, De Lin Institute of Technology, 4F., No.4, Alley 2, Lane 266, Sihwei Rd., Banciao City, Taipei County 220, Taiwan

Search for more papers by this author

https://doi.org/10.1142/S0219091509001575Cited by:2 (Source: Crossref)

Abstract

This paper uses differing objective functions under the Longstaff model (1990) to discuss the strategic choices faced by the creditor when deciding whether to grant maturity extension on a defaulted loan. The results reveal that: (1) it ensures that the return per unit of risk is higher after maturity extension than before; (2) it recognizes that the risk profile of the firm substantially affects the strategic behavior of the creditor; and (3) it demonstrates that the higher the profit sharing percentage the creditor get, the more willing it will be to extend maturity.

Keywords:

References

A. L. Anathanarayanan and E. S. Schwartz, Journal of Finance 35, 31 (1980). Crossref, Web of Science, Google Scholar
R. Anderson and S. Sundaresan, Review of Financial Studies 9, 37 (1996). Crossref, Web of Science, Google Scholar
F. Black and M. Scholes, Journal of Political Economy 81, 637 (1973). Crossref, Web of Science, Google Scholar
M. J. Brennan and E. S. Schwartz, Journal of Financial Economics 5, 67 (1977). Crossref, Web of Science, Google Scholar
F. A. Longstaff, Journal of Finance 45, 935 (1990). Crossref, Web of Science, Google Scholar
R. Merton, Journal of Finance 29, 449 (1974). Web of Science, Google Scholar
P. Mella-Barral and W. Perraudin, Journal of Finance 52, 531 (1997). Crossref, Web of Science, Google Scholar
F. Moraux and P. Navatte, Banque & Marchés 81, 51 (2006). Google Scholar
Moraux, F and P Navatte. Extending the maturity of debts in default: Some further insights. Finance Letters, in press . Google Scholar