Abstract:*

We study debt and equity valuation when investors have private information and may exhibit differences of opinion. We find that idiosyncratic distress risk impacts expected debt and equity returns. Expected debt returns increase and expected equity returns decrease with this risk for typical firms, but these relations weaken, and can even reverse, when (i) firms are close to default, (ii) disagreement is high, or (iii) liq uidity is low. Furthermore, firms’ capital structures affect their valuation even without classical capital structure frictions (e.g., tax shields, distress costs): when liquidity in equity is higher than in debt, leverage can raise firm value.

*Co-authored with B. Breaon-Drish (Rady School of Management) and K. Smith (Stanford University)

General information:

Attendance to this seminar is possible by invitation only. Please send an e-mail to finsec-abs@uva.nl if your are interested in attending this seminar.