Performance-sensitive debt (PSD) contracts link a loan's interest rate to a measure of the borrower's credit relevant performance, e.g. if the borrower's debt to cash ow ratio deteriorates, the interest rate increases according to a predetermined schedule. We derive and empirically test a...

Short-term debt can reduce potential agency conflicts between managers and shareholders by exposing managers to more frequent monitoring by the credit market. Using an international dataset, we examine whether internal monitoring can substitute for external monitoring through the use of...

We document that governments whose local currency debt provides them with greater hedging benefits actually borrow more in foreign currency. We introduce two features into a government's debt portfolio choice problem to explain this finding: risk-averse lenders and lack of monetary policy...

We derive a simple integral equation for the default probability over a finite time horizon of a company that makes coupon payments on its debt and infrequently returns to its leverage target by increasing its debt unless it defaults on its debt. Compared to the conventional (constant default...

This paper introduces serial defaults in the structural model of Jeanneret (2015. Journal of Financial and Quantitative Analysis 50, 963-985). We consider a government that can default multiple times, deciding endogenously the default thresholds and the optimal leverage. Under the extended...

A healthy financial system encourages the efficient allocation of capital and risk. The collapse of the house price bubble led to the financial crisis that started in 2007. There is a large empirical literature concerning the relation between asset price bubbles and financial crises. I evaluate...

Since 2002, spreads on emerging market sovereign debt have fallen to historical lows. Given the close links between sovereign spreads, capital flows to emerging markets, and economic growth, understanding the factors driving these spreads is very important. We address this issue in two stages....

We study the impact of the optimal debt and priority structure on corporate financing and investment decisions in a dynamic trade-off model, where a firm simultaneously issues bank and market debt. Private bank debt is renegotiable during financial distress; thus it avoids inefficient and costly...