The joint determination of capital structure and investment risk is examined. Optimal capital structure re ects both the tax advantages of debt less default costs (Modigliani-Miller), and the agency costs resulting from asset substitution (Jensen-Meckling). Agency costs restrict leverage and debt maturity and increase yield spreads, but their importance is relatively small for the range of envi...

Despite many past papers concerning a …rm’s capital structure, the valuation of debt and equity and cost of capital, there are few that explicitly codify contingent sharing rules for the …rm’s cash‡ow over time. We motivate equity and debt valuation by modeling tax and distress costs using cap and ‡oor technology as well as a default option at maturity. This approach sheds light on theoretical ...

This paper investigates into the determinants of capital structure for the small and medium sized enterprises (SMEs) in British manufacturing industry and the effects of product category on the determinants of capital structure. 220 SMEs from British manufacturing industry are selected for testing the six hypothesized relationships regarding the determinants of capital structure. Results sugges...

We examine how firms’ capital structure choices vary with the presence of dual class ownership. We document that, as compared to single class firms, dual class firms have higher leverage, greater propensity to issue private debt, greater reliance on relationship lending, as well as more frequent use of cash sweeps and performance-based covenants. These results are robust across several approach...

This paper examines determinants of creditor recoveries from defaulted debt instruments. First, we argue that to properly measure a debt instrument’s relative position in a firm’s debt structure, debt pari passu to the instrument must be accounted for. We thus propose a new measure of seniority and find that it is the most important determinant of recovery rates. Second, firm-level variables, e...

This paper considers appropriate debt funding strategies for state and municipal governments in the presence of a positive, tax-exempt term premium. The correlation between a measure of income from rate-sensitive assets and the tax-exempt floating rate is the principal focus of the analysis. A single period framework is used to identify the most important information required to design the opti...

one of the economic problems in the developing countries is the debt problem. external debt occurs in the developing countries due to the elimination of the restrictions on the savings gap, the foreign exchange gap, and the fiscal gap in order to form the capital to accelerate the economic growth (karakoy et al., 2012, p. 491). in contrast, borrowing and rising the external debt could be little...

This paper studies a dynamic equilibrium model of financial innovation with heterogeneous beliefs and competition among sellers of a new security. We show that both volume and price of the security after it is introduced are sensitive to the differing beliefs of participating players. We present conditions for the innovator to continue issuing the new security and for the imitator to enter the ...

The collateralised debt obligation (CDO) market has grown rapidly, both globally and in Australia, over recent years. CDOs are securities that are issued against a pool of assets that can include bonds, loans or asset-backed securities (ABS) including other CDOs.2 Increasingly, this exposure is being created synthetically by the use of derivatives written on these assets, rather than physically...

Titman and Wessels (1988) have used alternative debt instruments and factor analysis techniques (LISREL approach) to study the theories of optimal capital structure. Dittmar and Thakor (2007) developed a new theory called “managerial investment autonomy” to explain that a firm’s stock price and its capital structure are simultaneously decided. The main purpose of this paper is to integrate the ...