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Capital Structure

Paper Session

Sunday, Jan. 7, 2018 8:00 AM - 10:00 AM

Loews Philadelphia, Commonwealth Hall D
Hosted By: American Finance Association
  • Chair: Konstantin Milbradt, Northwestern University

Government Debt and Corporate Leverage: International Evidence

Irem Demirci
,
University of Mannheim
Jennifer Huang
,
Cheung Kong Graduate School of Business
Clemens Sialm
,
University of Texas-Austin and NBER

Abstract

We investigate the impact of government debt on corporate financing decisions. We document a negative relation between government debt and corporate leverage using data on 40 countries between 1990-2014. This negative relation holds only for government debt that is financed domestically and is stronger for larger and more profitable firms and in countries with more developed equity markets. In order to address potential endogeneity concerns, we use an instrumental variable approach based on military spending and a quasi-natural experiment based on the introduction of the Euro currency. Our findings suggest that government debt crowds out corporate debt.

Macroeconomic Risk and Idiosyncratic Risk-taking

Zhiyao Chen
,
Chinese University of Hong Kong
Ilya Strebulaev
,
Stanford University

Abstract

We develop and estimate a dynamic model of risk-shifting over the business cycle. First, equity holders with Epstein-Zin preferences increase their taking of idiosyncratic risk substantially more than the standard model in repeated games, because they perceive the arrival probability of bad states higher than the actual probability and prefer an early resolution of macroeconomic uncertainty. Second, sudden switches to bad states and large shocks in the bad states induce the countercyclical and ``synchronized'' idiosyncratic risk. Third, combined with high market risk premium in the bad states, the clustered risk-taking generates the countercyclical idiosyncratic volatility discount on equity returns.

A Theory of Multi-Period Debt Structure

Chong Huang
,
University of California-Irvine
Martin Oehmke
,
London School of Economics
Hongda Zhong
,
London School of Economics

Abstract

We develop a model of multi-period debt structure. A simple trade-off between the termination threat required to make repayments incentive compatible and the desire to avoid early liquidation determines the number of repayments, their timing, and repayment amounts. For mature firms with risky cash flows, frequent repayments maximize pledgeable income—for example, by rolling over short-term debt. In contrast, for firms with cash-flow growth or significant risk-free cash flows, adding risky repayments can decrease pledgeable income. In some cases, a single risky bullet repayment maximizes pledgeable income, effectively a long-term debt contract.
Discussant(s)
Adi Sunderam
,
Harvard University
Erik Loualiche
,
Massachusetts Institute of Technology
Jesse Davis
,
University of North Carolina-Chapel Hill
JEL Classifications
  • G3 - Corporate Finance and Governance