In this paper the problem of valuing corporate debt with possibility of default is considered. It is assumed that the volatility of the value of a firm's assets evolves according to an Ornstein-Uhlenbeck process and default occurs only if the value of corporate assets falls below an exogenously...

This paper links banking with asset prices in a monetary macroeconomic model. The main innovation is to consider how falling asset prices affect the banking system through wide-spread borrower default, while deriving explicit solutions and balance sheet effects even far from the steady state. We...

Net-worth covenants, as introduced by Black and Cox (1976), provide the firm’s bondholders with the right to force reorganization or liquidation if the value of the firm falls below a certain threshold. In the event of default, however, many bankruptcy codes stipulate an automatic stay of...

This article values equity and corporate debt by taking into account the fact that in practice the default point differs from the liquidation point and that it might be in the creditors' interest to delay liquidation. The article develops a continuous time asset pricing model of debt...

This paper argues that an optimal deposit insurance scheme would allow the level of insurance coverage to be determined by the market. Based on this principle, the paper proposes an insurance scheme that minimizes distortions and embodies fairness and credibility, two essential characteristics...

De juridische bescherming van banken en aandeelhouders beïnvloedt de omvang en kwaliteit van het financiële systeem en daarmee de economische groei. Gebrekkige (juridische) instituties in transitie-economieën kunnen de economische ontwikkeling van deze landen dan ook afremmen. Zo dragen...

This paper examines how the investment of financially constrained firms varies with their level of internal funds. We develop a theoretical model of optimal investment under financial constraints. Our model endogenizes the costs of external funds and allows for negative levels of internal funds....

Recent literature focuses on the systematic and specific components of credit risk (Dichev [1998], Wilson [1998], Jarrow, Lando & Yu [2001]). It is currently assumed, at least implicitly, that financial data are all subject to one latent systematic factor (Jarrow, Lando & Yu [2001], Lucas,...

The paper examines the interpretation of firms' investment-cash flow sensitivity as an artifact of financial market imperfection. Two alternative explanations of the financial constraints are compared. One is based on informational problems (asymmetric information). The other focuses on limited...

This paper analyses the determinants of banks’ loan loss allowances for samples of US banks and three non-US samples: a group of 21 countries, Canada and Japan. The model includes fundamental (or non-discretionary) determinants of the allowance such as non-performing loans, and discretionary...