This paper empirically examines how debt covenants impact the capital structure choices of firms, by utilizing an exogenous accounting based shock to the distance to covenant violation. We find that, on average, the shock to debt capacity had a positive impact on the debt choices of all treated...

Investment booms and asset "bubbles" are often the consequence of heavily leveraged borrowing and speculations of persistent growth in asset demand. We show theoretically that dynamic interactions between elastic credit supply (due to leveraged borrowing) and persistent credit demand (due to...

Germany is a reluctant supporter of the EU funds which are being used in the ‘bailout' of Ireland, and it insists on strict ‘austerity' conditions, concerned about risk and moral hazard.However, through its central bank, Germany is lending €325bn (December 2010) to other central banks in...

Traditional capital structure theory trades off tax savings of debt against bankruptcy costs. Combining elements of this theory with a model of the control role of debt characterizes the optimal amounts of equity, bank debt, and publicly traded debt. Debt's control role makes bankruptcy costs...

Performance sensitive debt (PSD) contracts link the paid coupon to a measure of firm performance. PSD contracts are widely used, especially as corporate bank loans. In a model where a firm has assets in place and the opportunity to invest in a growth option, I analyze how PSD affects...

This post will explore at length (warning!) and in detail (another warning — wonk alert!) the MMT perspective on the debt ratio and fiscal sustainability. While the approach suggests a macroeconomic policy mix and strategies for both fiscal and monetary policies that most neoclassical...

This paper examines the relation between a borrowing firm's ownership structure and its choice of debt source using a novel, hand-collected data set on corporate ownership, control and debt structures for 9,831 firms in 20 countries from 2001 to 2010. We find that the divergence between control...

The aim of this paper is to analyse for a multi-country large emerging market sample the choice between debt and equity simultaneously with the decision between short-and long-term debt. In order to investigate the joint decision among leverage and maturity we examine an unique sample of 986...

We analyze a defaultable firm's optimal capital and debt structures when its debt includes senior straight bonds and either Contingent Convertible or Write-Down bonds. The firm's stakeholders bear a liquidity risk prior to the debt maturity and a solvency risk at maturity. Credit events and...