We investigate the joint effect of production capacity choices and capital structure decisions on corporate debt default - related yield spreads. We find that the main driver of credit spreads is the incentive of self-interested shareholders to cash out assets in an economic decline and to...

We develop a dynamic structural model of the firm that allows us to carefully analyze the value of alternative financing strategies. We first illustrate the benefits of joint versus separate optimization of dynamic financing and investment policies. We then examine the impact on firm value of...