Bankruptcy Mechanism, Bond Price And Optimal Capital Structure: Based On Numerical Simulation And Case Research

The law on enterprise bankruptcy is used for resolving the interest conflict between creditors and the debtor.The bankruptcy procedures sharply affect the division of the value in financial distressed corporation among them.Therefore,the bankruptcy law is directly bound up with the their benefit.New bankruptcy code is the new constitution on economy in China.It is concerned about the death and renascence of corporations.The target of this paper is to investigate the influence of the bankruptcy mechanism on the behavior and interest of creditors and the debtor. After the debtor defaults,there are three kinds of bankruptcy mechanism to the debtor-creditor relaitonship,which are bankruptcy liquidation,private debt reconstruction(out of court reconstruct) and bankruptcy reorganization.This paper explores some effects of some factors on creditors behavior and their benefit under each bankruptcy mechanism by employing case research.By analyzing the classeal cases,the finding is that the recovrery ratio decrease with bankruptcy cost and bankruptcy liquidaton period under bankruptcy liquidaton mechanism. Under private debt reconstruction,the repayment that creditors can accept relys on the distribution of the bargaining power between creditors and equity holders.The bankruptcy reorganization period and the financial distress costs are key factors which play the important roles on the recovrery ratio under bankruptcy reorganization.Once again,the bargaining power affects the distribution about the asset value betwwen creditors and the debtor.Pirvate debt reconstruction and bankruptcy reorganization have different advantanges and disadvantages.The recovery ratio is higher under bankruptcy reorganization than under pirvate debt reconstruction.This paper explore some factors on corporation bond prices and optimal capital structure based each bankruptcy mechanism expectation by employing the numerical simulation technique.When creditors and the debtor have the only choice,bankruptcy liquidation to resolve the financial distress,the results illustrate that bankruptcy costs play the important effcte on bond prices and capital structure.High bankruptcy costs decrease bond picese,especially,the influence is evident as bankruptcy approached. Besides bankruptcy liquidation,if creditors and the debtor have another resolutions, private debt reconstruction or bankruptcy reorganization,there is a nash bargaining game among them.The game characterizes the bargaining process among creditors and equity holders for the sharing rule for the cash flow from assets during default. The nash equilibrium solution of the game plays sharply effects on bond prices and capital structure.Under private debt reconstruction,the repayment that creditors can accept relys on the distribution of the bargaining power between creditors and equity holders.Wiht higher bankruptcy cost and stronger bargaining power of shareholders, the debtor will pay creditors lower duiring default,then credit spread will increase. Under bankruptcy reorganization,with the extension of bankruptcy reorganization period,the conclusion on bond prices and capital structure from bankruptcy reorganization also holes ture to bankruptcy liquidation and the private debt reconstruction.The optimal leverage,and credit spreads,ceteris paribus,is increasing with bankruptcy reorganization period.Being different from other variables,the distribution of the bargaining power between creditors and shareholders changes the way which the reorganization period acts on the optimal leverage.However,the variable has slim effect on the credit spread.