We document an increase in cases where credit default swap (CDS) investors intervene in the restructuring of a distressed firm. In our theoretical analysis, we show that—contrary to popular belief—intervention by CDS investors is not necessarily reducing firm value. While the equilibrium CDS...

We study optimal bank regulation in an economy with aggregate uncertainty. Bank liabilities are used as “money” and hence earn lower returns than equity. In laissez faire equilibrium, banks maximize market value, trading off the funding advantage of debt against the risk of costly default....

Lack of shareholders' commitment about debt and investment policies increases the cost of debt by a quantity that we refer to as the agency (credit) spread. The agency spread increases with the number of periods for which debt holders are exposed to policies that decrease the value of debt: from...

We solve the credit spread puzzle with a structural model of firm's policies that endogenously replicates the empirical cross-section of credit spreads. Structural estimation of the model's parameters reveals that the model cannot be rejected by the data, and that endogenous investment decisions...

We examine the effectiveness of debt covenants in alleviating financial agency problems. Distortions in both investment and financing policies with long--term debt are captured in a structural dynamic model where both policies are endogenously determined by shareholders. The combined and...

This paper studies the impact of bank regulation and taxation in a dynamic model where banks are exposed to credit and liquidity risk and can resolve financial distress in three costly forms: bond issuance, equity issuance or fire sales. We find an inverted U{shaped relationship between capital...

This paper studies the impact of bank regulation and taxation in a dynamic model where banks are exposed to credit and liquidity risk and can resolve financial distress in three costly forms: bond issuance, equity issuance or fire sales. We find an inverted U-shaped relationship between capital...

The paper investigates the impact on credit risk of capital structure choices driven by firm's investments and financing decisions. We propose a realistic dynamic structural model featuring endogenous investment, capital structure and default. We calibrate the model on accounting and market...

Current corporate risk management theories predict that young firms should hedge more than the established ones. However, the claim is not supported by empirical observations, which also present mixed evidence on whether hedging creates value. This paper attempts to address this puzzle by...

We empirically document and theoretically investigate why non-dilutive CoCos are prevalent, even though advocates of CoCos suggest such securities should be dilutive to reduce bank risk-taking. In an agency model with two subsequent moral hazards, we show that while dilutive CoCos deter ex-ante...