This paper described a theory of capital allocation for decentralized businesses, taking into account the costs associated with risk capital. We derive an adjusted present value expression for making investment decisions, that incorporates the time varying profile of risk capital. We discuss the...

The paper examines three equity-based structural models to study the nonlinear relationship between equity and credit default swap (CDS) prices. These models differ in the specification of the default barrier. With cross-firm CDS premia and equity information, we are able to estimate and compare...