MODELING OF RATIONAL STATE DEBT STRUCTURE

Rational Asset Pricing Bubbles and Debt Constraints

Rational price bubble arises when the price of an asset exceeds the asset’s fundamental value, that is, the present value of future dividend payments. The important result of Santos and Woodford (1997) says that price bubbles cannot exist in equilibrium in the standard dynamic asset pricing model with rational agents facing borrowing constraints as long as assets are in strictly positive supply...

Dynamic Capital Structure with Callable Debt and Debt Renegotiations

We consider a dynamic model of the capital structure of a firm with callable debt that takes into account that equity holders and debt holders have a common interest in restructuring the firm’s capital structure in order to avoid bankruptcy costs. Far away from the bankruptcy threat the equity holders use the call feature of the debt to replace the existing debt in order to increase the tax adv...

Debt Structure and Financial Flexibility

I study the relation between firm debt structure and future financial flexibility. I consider how the total level of debt, maturity, security, and priority may potentially impact a firm’s ability to raise new financing and undertake profitable investments. I find that firms with lower total debt (high debt capacity) are more financially flexible. Lower leverage increases future new debt issues ...

Executive Compensation and Debt Structure of REITs

This paper examines how executives’ compensation structure interacts with firm debt structure, and focuses on how executives’ compensation structure affects firm financing choice between secured debt and unsecured debt. Based on the compensation contracts, executives make corresponding investment and financing decisions for their firms. Therefore, different compensation structures may lead to d...

Optimal Taxation without State-Contingent Debt