Equilibrium Of The Information Revelation And Optimal Debt Safety Covenant Under The Incomplete Information

With the increasing international financial services, as well as the increasing weight of default risk over financial risk, the topic of reasonable pricing has become more and more imperative in financial innovation of financial institution, especially, the establishments of related debt contacts has emerged as a necessary problem considered by many investors. Nowadays, the general evaluation methods for default risk assume that the information of financial market is complete, however, the related information for firm's value is considered to be incomplete. In addition, what we have done for the debt evaluation generally lies in the best benefits to the creditor on the condition of maximum profit. If the two variables, including firm's debt level and firm's information revelation for firm's financial information are the controlled decision variables of the shareholder/stockholder, the shareholder will be able to make the tradeoff between both variables based on the maximum profits.Accordingly, this paper is proposed under this situation. The quantitative and also qualitative analytic method is used on the assumption that the firm's information revelation is uncertain. However, if the information is exposed to public, the outer-investors/creditors are able to realize the exact value of a company, and hence, they can analyze the establishments for optimal safety covenant and risky debt valuation, and simultaneously consider the decision under such schemes.There are two models research the Equilibrium of the information revelation and optimal debt Safety Covenant under the incomplete information.It is assumed in the first model that the creditor and stockholder have their own decisions for the optimal default threshold. While the model of bargain is applied, if the arrival rate for the information flow is below the equilibrium, the creditor will choose a higher threshold for default bankrupt, however, when the arrival rate of the flow increases, the gap is determined to be decreasing, and a conversely changing curve is shown on the contrary. The second model assumes that both the creditor and stockholder have the deterministic rights for default threshold and information exposure, the equilibrium solution can be achieved by using the game theory. As for the creditor, the less information exposure will lead to higher default threshold, whereas if the default threshold is a bit higher, the stockholder will choose lower information exposure, and then both sides may consider their own decision and the other side simultaneously, finally will achieve the simple Cournot -- game theory equilibrium.