Counterparty Risk and Capital Structure
نویسندگان
چکیده
The 2007-2009 financial crisis and recession highlighted the role of counterparty risk in financial contracts, many once thought immune to such problems. However, counterparty risk can be significant in a wide variety of contracting situations and can impact capital structure decisions. Using commercial real estate leases as an example, this paper presents a new model that endogenizes the capital structure of both parties to a contract. We follow Grenadier (1996) and Leland and Toft (1996) to examine the interaction between firm capital structures and equilibrium contract pricing. Moreover, in a commercial lease setting, our model demonstrates that consideration of credit risk is instrumental to confirm the complementarity between lease and debt as suggested by Lewis and Schallheim (1992).
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