Macroeconomic Conditions and the Puzzles of Credit Spreads and Capital Structure
Author(s)
Chen, Hui
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Show full item recordAbstract
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.
Date issued
2010-11Department
Sloan School of ManagementJournal
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