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Corporate Bankruptcies, Investment and Equilibrium Capital Structures

Richard Harris

Working Paper from Economics Department, Queen's University

Abstract: This paper proposes a general equilibrium model with the feature that value maximizing firms which obtain financing in a competitive capital market will, when bankruptcy is possible, have capital structures which are equilibrium determined variables. This contrasts the traditional view which suggests when the corporation's bond are risky it must choose an optimal capital structure. The firm's investment decision will depend upon its capital structure parameter and the nominal interest rate on its bonds. In addition, the competitive allocation of investment is not efficient.

Date: 1976
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