I construct an infinite-horizon dynamic stochastic general equilibrium model with a collateral constraint and actual default in equilibrium. Entrepreneurs borrow from households through non-recourse debt contracts backed by capital goods. By taking into account the non-linear payoffs of the...

Following spikes in aggregate uncertainty, firm-level physical capital drops along with large liquidity buildup and deleveraging. Conventional macro-finance models treating corporate cash holding as net debt fail to capture the observed liquidity buildup when reproducing deleveraging, leaving an...

If firms can issue debt only at discrete dates, debt maturity is an effective device against the commitment problem on debt and investment policies. With shorter maturities, debt dynamics are less persistent and more valuable because upward leverage adjustments are faster and long-run leverage...

We introduce long-term debt and a maturity choice into a dynamic model of production, firm financing, and costly default. Long-term debt saves roll-over costs but increases future leverage and default rates because of a commitment problem. The model generates rich distributions of maturity...

The government proposed an unexpected one-time debt-equity swap in China in response to the rapidly growing leverage ratio of non-financial firms after 2008. We study the effects of this policy on the firms' investment decisions and the optimal capital structure in a dynamic model. To...

We test one of the main predictions of the financial flexibility paradigm, that expectations about future firm-specific investment shocks affect the firm's leverage. We extract the expectations of small and large future shocks from the market prices of equity options. We find that leverage...

In a dynamic framework, this paper studies a firm’s optimal capital structure choice in terms of the maturity and call premium of the debt. The firm’s capital structure is optimized accordingto a trade-off between a tax advantage of debt, bankruptcy costs and debt issuance costs. The central...

In this paper we have formulated a simple theoretical model for the dynamics of the time-varying target leverage ratio of a firm under some assumptions based upon empirical observations. In our theoretical model the time evolution of the target leverage ratio of a firm can be derived...