This paper integrates the problem of designing corporate bankruptcy rules into a theory of optimal debt structure. We show that, in an optimal contracting framework with imperfect renegotiation, having multiple creditors increases a firm’s debt capacity while increasing its incentives to default strategically. The optimal debt contract gives creditors claims that are jointly inconsistent in cas...

We develop a dynamic incomplete-markets model of entrepreneurial firms, and demonstrate the implications of nondiversifiable risks for entrepreneurs’ interdependent consumption, portfolio allocation, financing, investment, and business exit decisions. We characterize the optimal capital structure via a generalized tradeoff model where risky debt provides significant diversification benefits. No...

We analyze the impact of changes in thin capitalization rules on corporations' capital structure. Thin capitalization rules prevent rms from deducting excessive interest expenses from their tax base. As of 2008, Germany has severely changed its thin capitalization rule by targeting interest payments instead of debt to equity ratios. The new rule has primarily been introduced to prohibit tax avo...

We analyze a model of optimal capital structure and liquidity choice based on a dynamic tradeoff theory for financially constrained firms. In addition to the classical tradeoff between the expected tax advantages of debt and bankruptcy costs, we introduce a cost of external financing for the firm, which generates a precautionary demand for liquidity and an optimal liquidity management policy fo...

Despite the large size of the Brazilian debt market, as well the large diversity of its bonds, the picture that emerges is of a market that has not yet completed its transition from the role it performed during the megainflation years, namely that of providing a liquid asset that provided positive real returns. This unfinished transition is currently placing the market under severe stress, as f...

This paper integrates the problem of designing corporate bankruptcy rules into a theory of optimal debt structure. We show that, in an optimal contracting framework with imperfect renegotiation, having multiple creditors increases a firm’s debt capacity while increasing its incentives to default strategically. The optimal debt contract gives creditors claims that are jointly inconsistent in cas...

This paper analyzes the effects of government debt and income taxes on consumption and saving in a world of infinitely lived households having uncertain and heterogeneous incomes. The special structure of the model allows exact aggregation across households despite incomplete markets. The effects of government debt are shown to be substantial, roughly comparable to those resulting from finite h...

n Robert M. Hull is an Associate Professor of Finance at Washburn University. In this paper, I extend the stock-for-debt research by investigating whether stock value is influenced by how a firm changes its leverage ratio in relationship to its industry leverage ratio norm. I find that announcement-period stock returns for firms moving “away from” industry debt-to-equity norms are significantly...

Given the increasing importance of financing in foreign currency denominated debt, researchers have shown the conditions under which raising capital denominated in a foreign currency becomes feasible. We extend this literature in the context of a multinational corporation (MNC) by modeling the rivalry between equity and debt under a modified general equilibrium framework. We derive (i) internat...

Historically, corporations have mainly financed their activities with two securities, debt and equity. The stockholders have responsibility for the operation of the firm through the election of the board of directors; the dividends they receive in return for their subscription of capital are not guaranteed and are paid at the discretion of the board of directors. In contrast, debtholders are pr...