Capital structure, investment, and fire sales
Title: Capital structure, investment, and fire sales
Citation: Review of financial studies, 2015, Vol. 28, No. 9, pp. 2502-2533
We study a dynamic general equilibrium model in which firms choose their investment level and capital structure, trading off the tax advantages of debt against the risk of costly default. Bankruptcy costs are endogenous, as bankrupt firms are forced to liquidate their assets, resulting in a fire sale if the market is illiquid. When the corporate income tax rate is positive, firms have a unique optimal capital structure. In equilibrium, firms default with positive probability and their assets are liquidated at fire-sale prices. The equilibrium features underinvestment and is constrained inefficient. In particular there is too little debt and default.
Is version of EUI ECO; 2013/09 - http://hdl.handle.net/1814/28599
Initial version: http://hdl.handle.net/1814/28599
Files in this item
There are no files associated with this item.