Publication

The effects of business cycle and debt maturity on a firm's investment and default decisions

2015
Journal Articles

Abstract

We propose a model that jointly determines the capital structure and investment decisions taking business cycle and debt maturity into account. It endogenously determines the triggers of investment/disinvestment and default, which depend on the state of the economy. The investment triggers can be unimodal or bimodal with respect to debt maturity depending on the volatility of the growth opportunities. The optimal leverage ratio tends to increase as recession shortens, which induces higher yield spreads for short-term debt; but long-term debt is more affected by increase of expected cash flow, and thus the yield spreads decrease. (C) 2015 Elsevier Inc. All rights reserved.

Official source

https://infoscience.epfl.ch/entities/publication/63730bfd-1598-4d02-a4f0-c6724cf5f14b

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2015
Journal Articles

Abstract

Official source

https://infoscience.epfl.ch/entities/publication/63730bfd-1598-4d02-a4f0-c6724cf5f14b

About this result

Related concepts (32)

Debt

Debt is an obligation that requires one party, the debtor, to pay money borrowed or otherwise withheld from another party, the creditor. Debt may be owed by sovereign state or country, local government, company, or an individual. Commercial debt is generally subject to contractual terms regarding the amount and timing of repayments of principal and interest. Loans, bonds, notes, and mortgages are all types of debt. In financial accounting, debt is a type of financial transaction, as distinct from equity.

Capital structure

In corporate finance, capital structure refers to the mix of various forms of external funds, known as capital, used to finance a business. It consists of shareholders' equity, debt (borrowed funds), and preferred stock, and is detailed in the company's balance sheet. The larger the debt component is in relation to the other sources of capital, the greater financial leverage (or gearing, in the United Kingdom) the firm is said to have.

Government debt

A country's gross government debt (also called public debt, or sovereign debt) is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit occurs when a government's expenditures exceed revenues. Government debt may be owed to domestic residents, as well as to foreign residents. If owed to foreign residents, that quantity is included in the country's external debt. In 2020, the value of government debt worldwide was $87.

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The effects of business cycle and debt maturity on a firm's investment and default decisions

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