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Capital Structure, Credit Risk, and Macroeconomic Conditions

Dirk Hackbarth, Jianjun Miao () and Erwan Morellec ()
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Erwan Morellec: University of Lausanne, FAME, and CEPR

No WP2005-005, Boston University - Department of Economics - Macroeconomics Working Papers Series from Boston University - Department of Economics

Abstract: This paper develops a framework for analyzing the impact of macroeconomic conditions on credit risk and dynamic capital structure choice. We begin by observing that when cash flows depend on current economic conditions, there will be a benefit for firms to adapt their default and financing policies to the position of the economy in the business cycle phase. We then demonstrate that this simple observation has a wide range of empirical implications for corporations. Notably, we show that our model can replicate observed debt levels and the countercyclicality of leverage ratios. We also demonstrate that it can reproduce the observed term structure of credit spreads and generate strictly positive credit spreads for debt contracts with very short maturities. Finally, we characterize the impact of macroeconomic conditions on the pace and size of capital structure changes, and debt capacity.

Keywords: Dynamic capital structure; Credit spreads; Macroeconomic conditions (search for similar items in EconPapers)
JEL-codes: G12 G32 G33 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2005-11
New Economics Papers: this item is included in nep-bec, nep-fin, nep-fmk and nep-mac
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Forthcoming in Journal of Financial Economics

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http://people.bu.edu/miaoj/business.pdf (application/pdf)

Related works:
Journal Article: Capital structure, credit risk, and macroeconomic conditions (2006) Downloads
Working Paper: Capital Structure, Credit Risk, and Macroeconomic Conditions (2005) Downloads
Working Paper: Capital Structure, Credit Risk, and Macroeconomic Conditions (2004) Downloads
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