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 financing and bankruptcy costs, we introduce a cost of external financing for the firm, which generates a precautionary demand for cash and an optimal retained earnings policy ...

We theoretically and empirically investigate the effects of manager-specific characteristics on capital structure. We develop a dynamic structural model in which a manager affects a firm’s earnings through her ability and effort. The manager receives dynamic incentives through explicit contracts with shareholders. We derive the manager’s contracts and implement them through financial securities...

The paper investigates the effects of macroeconomic conditions on firms’ capital structure. We introduce a repeated lender-borrower interaction that allows for debt and equity financing to co-exist as optimal securities in every period. The presence of asymmetric information in the market for loans is responsible for endogenous fluctuations to take place.It is possible to state sufficient condi...

We consider firm financing when the firm quality is private information of the manager and, given its inherent quality, the project viability depends on the manager exerting unobservable effort. We show that capital structure matters even though managerial contracts are optimally designed. Good firms would like to issue more debt to avoid selling underpricing equity. However, the interaction be...

In 1976 Black and Cox proposed a structural model where an obligor defaults when the value of its assets hits a certain barrier. In 2001 Zhou showed how the model can be extended to two obligors whose assets are correlated. In this paper we show how the model can be extended to a large number of different obligors. The correlations between the assets of the obligors are determined by one or mor...

ONETIZING the debt” conjures up fearsome images of excessive money stock growth resulting from Federal Reserve purchases of Treasury debt. Many analysts fear that debt monetization may produce undesirable economic consequences, such as more rapid inflation and, thus, higher nominal interest rates. There appears to be some confusion, however, over what debt monetization means, whether or to what...

This paper reviews alternative options for monetary policy when the short-term interest rate is at the zero lower bound and develops new empirical estimates of the effects of the maturity structure of publicly held debt on the term structure of interest rates. We use a model of risk-averse arbitrageurs to develop measures of how the maturity structure of debt held by the public might affect the...

Abstract Today, debt stabilization in an uncertain environment is an important issue. In particular, the question how fiscal and monetary authorities should deal with this uncertainty is of much importance. Especially for some developing countries such as Iran, in which on average 60 percent of government revenues comes from oil, and consequently uncertainty about oil prices has a large effec...

This paper develops a model of optimal government debt maturity in which the government cannot issue state-contingent bonds and the government cannot commit to fiscal policy. In contrast to an environment with full commitment, there is a tradeoff between the cost of funding and the benefit of hedging. Borrowing long term provides the government with a hedging benefit since the value of outstand...