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Capital Structure (Leverage)

Paper Session

Friday, Jan. 4, 2019 8:00 AM - 10:00 AM

Hilton Atlanta, 212-213-214
Hosted By: American Finance Association
  • Chair: Michael Roberts, University of Pennsylvania

Optimal Capital Structure and Bankruptcy Choice: Dynamic Bargaining Versus Liquidation

Samuel Antill
,
Stanford University
Steven Grenadier
,
Stanford University

Abstract

We model a firm's optimal capital structure decision in a framework in which it may later choose to enter either Chapter 11 reorganization or Chapter 7 liquidation. Creditors anticipate equityholders' ex-post reorganization incentives and price them into the ex-ante credit spreads. Using a realistic dynamic bargaining model of reorganization, we show that the off-equilibrium threat of costly renegotiation can lead to lower leverage, even with liquidation in equilibrium. If reorganization is less efficient than liquidation, the added option of reorganization can actually make equityholders worse off ex-ante, even when they liquidate on the equilibrium path.

Capital Structure and Hedging Demand with Incomplete Markets

Alberto Bisin
,
New York University
Gian Luca Clementi
,
New York University
Piero Gottardi
,
European University Institute

Abstract

Capital structure choices are the result of supply considerations, such as taxes, costly default, agency, and asymmetric information, as well as demand factors, among which investors' hedging demand. The latter, which has received very little attention in the academic literature, is at the core of this paper. In a general equilibrium model with production and incomplete markets where households differ in their risk--sharing needs, ex--ante identical value--maximizing firms issue different securities, in order to cater to different groups of investors. We find that as the demand for hedging increases, corporates grow in size -- to allow for greater precautionary saving -- and issue more debt. How much more, depends on the availability of competing risk-sharing instruments, such as (government--issued) risk--free debt and derivatives. When capital structure is jointly shaped by demand and supply considerations -- the latter, in the form of an asset--substitution problem -- we find that (i) agency is relevant only when hedging demand is high and that (ii) larger investors' risk--sharing needs lead to equilibria featuring greater aggregate risk.

The Maturity Premium

Maria Chaderina
,
Vienna University of Economics and Business
Patrick Weiss
,
Vienna Graduate School of Finance
Josef Zechner
,
Vienna University of Economics and Business

Abstract

We analyze asset-pricing implications of debt maturity. Firms with long debt maturities have weaker incentives to delever after negative shocks and therefore exhibit high leverage and high betas during downturns when the market price of risk is high. They also increase leverage less aggressively during booms. Thus, the betas of firms with longer debt maturities covary more with the market price of risk. As a result, they generate higher expected returns, controlling for average exposure to systematic risk. We demonstrate this in a model and document empirically a 0.21% monthly premium for buying long-maturity financed firms and selling those with shorter debt maturities.
Discussant(s)
Neng Wang
,
Columbia University
Joao Gomes
,
University of Pennsylvania
Hui Chen
,
Massachusetts Institute of Technology
JEL Classifications
  • G3 - Corporate Finance and Governance