E-companion to ‘Systemic Influences on Optimal Equity-Credit Investment’
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Systemic Influences on Optimal Equity-Credit Investment
We introduce an equity-credit portfolio framework taking into account the structural interaction of market and credit risk, along with their systemic dependencies. We derive an explicit expression for the optimal investment strategy in stocks and credit default swaps (CDSs). We exploit its representation structure and analyze the mechanisms driving the optimal investment decisions. The transmis...
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A contingent claims model with differential beliefs between debt and equity holders about the asset’s growth rate and volatility is used to study the impact of differential information between debt and equity holders on firm value, optimal capital structure, the timing of investment and other variables such as the credit spreads. The model explains the existence of debt constraints when debt ho...
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Recent empirical work using panel data documents that, while the correlation of investment and Tobin’s Q is low, the correlation of investment and credit spreads is high. We propose an explanation for these empirical findings, based on time-varying risk, i.e. stochastic volatility. In our model, firms finance investments using defaultable debt as well as equity issuance, and they are subject to...
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In a general equilibrium model we examine the optimal allocation of equity and debt across banks and industrial rms when both are plagued by incentive problems and rms can borrow from banks. Increasing bank equity mitigates bank-level moral hazard but may exacerbate rm-level moral hazard due to dilution of rm equity. Competition of banks will not result in a socially e cient level of equity. Im...
متن کاملAn Optimal Investment Policy in Equity-Debt Financed Firms with Finite Maturities
In this paper we examine an optimal investment policy of the firm, which is financed by issuing equity and debt during a period of time, using real options framework. We examine the effects of the maturity of investment on the values of equity, debt, firm, tax shield and bankruptcy cost. Specifically, we show that the investment timing depends not only on the investment threshold but also on th...
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تاریخ انتشار 2016