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The MIT Faculty has made this article openly available. Please share how this access benefits you. Your story matters. Abstract I build a dynamic capital structure model that demonstrates how business-cycle variations in expected growth rates, economic uncertainty, and risk premia influence firms' financing and default policies. Countercyclical fluctuations(More)
We use the August 2007 crisis episode to gauge the causal effect of financial contracting on real firm behavior. We identify heterogeneity in financial contracting at the onset of the crisis by exploiting ex-ante variation in long-term debt maturity structure. Using a difference-indifferences matching estimator approach, we find that firms whose long-term(More)
  • Lee Pinkowitz, René Stulz, Rohan Williamson, Kathryn-Ann Bloomfield, Michael Chiang, Mark Ervin +14 others
  • 2006
Agency theories predict that the value of corporate cash holdings is less in countries with poor investor protection because of the greater ability of controlling shareholders to extract private benefits from cash holdings in such countries. Using various specifications of the valuation regressions of Fama and French (1998), we find that the relation(More)
Financial distress is more likely to happen in bad times. The present value of distress costs therefore depends on risk premia. We estimate this value using risk-adjusted default probabilities derived from corporate bond spreads. For a BBB-rated firm, our benchmark calculations show that the risk-adjusted NPV of distress is 4.5% of pre-distress firm value.(More)
In most cases authors are permitted to post their version of the article (e.g. in Word or Tex form) to their personal website or institutional repository. Authors requiring further information regarding Elsevier's archiving and manuscript policies are encouraged to visit: Abstract This paper develops and tests a model of how country characteristics, such as(More)
We show theoretically that while cash allows financially constrained firms to hedge future investment against income shortfalls, reducing current debt is a more effective way to boost investment in future high cash flow states. Thus, constrained firms prefer higher cash to lower debt if their hedging needs are high, but lower debt to higher cash if their(More)
Intuition suggests that firms with higher cash holdings should be 'safer' and have lower credit spreads. Yet empirically, the correlation between cash and spreads is robustly positive. This puzzling finding can be explained by the precautionary motive for saving cash, which in our model causes riskier firms to accumulate higher cash reserves. In contrast,(More)
We estimate firm-specific marginal cost of debt functions for a large panel of companies between 1980 and 2007. The marginal cost curves are identified by exogenous variation in the marginal tax benefits of debt. The location of a given company's cost of debt function varies with characteristics such as asset collateral, size, book-to-market, asset(More)
We study the interplay between corporate liquidity and asset reallocation. Our model shows that financially distressed firms are acquired by liquid firms in their industries even in the absence of operational synergies. We call these transactions ''liquidity mergers,'' since their purpose is to reallocate liquidity to firms that are otherwise inefficiently(More)
We develop a model to explore the asset pricing implications of firms being buyers of last resort for their own stocks. Those with more ability to repurchase shares when prices drop far below fundamental value (i.e., less financially constrained ones) should have lower short-horizon return variance (controlling for fundamental variance) than other firms.(More)