A Theory of Corporate Capital Structure and Investment

Miguel Cantillo Simon.

No RPF-268, Research Program in Finance Working Papers from University of California at Berkeley

Abstract: This article describes how financial disruptions affect investment in a general equilibrium economy. I show that in a world with differentiated lenders, the most efficient will become financial intermediaries; their preeminence will nonetheless be limited by frictions with depositors. Because of these frictions, cash rich companies prefer to tap the bond market directly, while moderately endowed firms borrow from intermediaries, and cash poor companies are unable to borrow at all. The aggregation of this model produces an economy with intuitive features: investment falls whenever the risk free rate rises, or when the financial health of firms and intermediaries deteriorates.

Date: 1996-11-01
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