Debt maturity and endogenous default with optimal stopping theory
Stephane Villeneuve (University of Toulouse)
We focus on corporate models in which debt maturity is modeled in the vein
of Leland and Leland and Toft. We point out that these corporate models restrict the set
of available bankruptcy policies to hitting times. We write the equity-holders’ bankruptcy
problem as a general optimal stopping problem that we solve. We show that restricting
bankruptcy policies to hitting times may lead to a dramatic underestimation of the value of
equity especially for short term debt.