When Is (Performance-Sensitive) Debt Optimal?

When Is (Performance-Sensitive) Debt Optimal?

Pierre Chaigneau, Alex Edmans, Daniel Gottlieb

Series number :

Serial Number: 
780/2021

Date posted :

August 18 2021

Last revised :

August 18 2021
SSRN Share

Keywords

  • Informativeness principle • 
  • Limited Liability • 
  • performance-sensitive debt

Existing theories of debt consider a single contractible performance measure ("output"). In reality, many other performance signals are also available. It may seem that debt is no longer optimal; for example, if the signals are sufficiently positive, the agent should receive a payment even if output is low.

This paper shows that debt remains the optimal contract under additional signals -- they only affect the face value of debt, but not the form of the contract. We show how the face value should depend on other signals, providing a theory of performance-sensitive debt.

Authors

Real name:
Pierre Chaigneau
Real name:
Daniel Gottlieb