Macroeconomic Conditions and the Puzzles of Credit Spreads and Capital Structure
Name
Chen_Macroeconomic Conditions.pdf
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464.58 KB
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Adobe PDF
Checksum (MD5)
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Author(s)
Chen, Hui
Date Issued
November 2010
Journal
Journal of Finance
Publisher
American Finance Association
Citation
Chen, Hui. “Macroeconomic Conditions and the Puzzles of Credit Spreads and Capital Structure.” The Journal of Finance 65.6 (2010) : 2171-2212. © 2010 the American Finance Association
Version
Author's final manuscript
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 in risk prices, default probabilities, and default
losses arise endogenously through firms’ responses to the macroeconomic conditions. These
comovements generate large credit risk premia for investment grade firms, which helps address
the “credit spread puzzle” and “under-leverage puzzle” in a unified framework. The model
generates interesting dynamics for financing and defaults, including “credit contagion” and
market timing of debt issuance. It also provides a novel procedure to estimate state-dependent
default losses.
MIT Department
Sloan School of Management
Terms of Use
Creative Commons Attribution-Noncommercial-Share Alike 3.0
Persistent DSpace Link
DOI of Published Version
https://doi.org/10.1111/j.1540-6261.2010.01613.x
