Macroeconomic Conditions and the Puzzles of Credit Spreads and Capital Structure

Hui Chen ()

No 16151, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: I build a dynamic capital structure model that demonstrates how business-cycle variations in expected growth rates, economic uncertainty, and risk premia influence firms' financing and default policies. Countercyclical fluctuations in risk prices, default probabilities, and default losses arise endogenously through firms' responses to the macroeconomic conditions. These comovements generate large credit risk premia for investment grade firms, which helps address the "credit spread puzzle" and "under-leverage puzzle" in a unified framework. The model generates interesting dynamics for financing and defaults, including "credit contagion" and market timing of debt issuance. It also provides a novel procedure to estimate state-dependent default losses.

JEL-codes: E44 G12 G13 G32 G33 (search for similar items in EconPapers)
Date: 2010-07
New Economics Papers: this item is included in nep-mac and nep-rmg
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (261)

Published as Hui Chen, 2010. "Macroeconomic Conditions and the Puzzles of Credit Spreads and Capital Structure," Journal of Finance, American Finance Association, vol. 65(6), pages 2171-2212, December.

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Journal Article: Macroeconomic Conditions and the Puzzles of Credit Spreads and Capital Structure (2010)
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