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Capital Structure, Credit Risk, and Macroeconomic Conditions

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

FAME Research Paper Series from International Center for Financial Asset Management and Engineering

Abstract: This paper develops a framework for analyzing the impact of macroeceomic 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 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 very short maturities. Finally, we characterize the impact of macroeconomic conditions on the pace and size of capital structure changes, and debt capacity. A number of new predictions follow.

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)
Date: 2004-05
New Economics Papers: this item is included in nep-bec, nep-cfn and nep-fin
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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 (2005) Downloads
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