This paper develops a model with the novel feature that firms can renegotiate debt both in and outside distress. We show that this feature is crucial for debt renegotiation models to explain corporate policies and debt prices. Specifically, the model reflects empirical credit spread patterns,...

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...

This article challenges Modigliani & Miller's (M&M) Famous Homemade Leverage Proof. The M&M proof suggests that since in efficient markets any value impact from leverage results in a homemade arbitrage opportunity, leverage must be value neutral. However, through the uncontroversial notion of...

How do firms manage debt maturity in the presence of investment opportunities? I document empirically that US corporations lengthen their average maturity of debt when output and investment rates are larger. To explain these findings, I construct an economic model where firms dynamically choose...

Using a dynamic model of financing, investment, and macroeconomic risk, we investigate when firms sell assets to fund investments (financing asset sales) across the business cycle. Equity financed investment transfers wealth from equity to debt because asset volatility declines and earnings...

This paper uses firm-level financial data for Czech firms in the period from 2003 to 2011 and tests for the role of companies' financial structure in the transmission of monetary policy. Our results indicate that higher short-term interest rates coincide with lower shares of total debt and...

We study the impact of the concentration and complexity of the banking sector on firms' financing and investment behavior over the business cycle. We find that, after the late 1990s, while debt issuance remained procyclical for US firms of all sizes, equity issuance and liquidity accumulation...

Firms reduce investment to avoid costly violations of financial covenants, most of which are based on earnings. Empirically, I show that a 25% drop in earnings implies a 15% decrease in investment for the median listed US firm due to the reduced distance to the covenant threshold. To quantify...

Corporate bond issuers in emerging economies in Asia have often had a choice between an onshore market and an offshore one. Since 1998, however, many of these issuers have increasingly turned to the onshore market. This paper investigates systematically what factors have influenced this choice...

We show that a policy rate cut lengthens corporate debt maturity. A 1 standard deviation (10 basis points, b.p.) expansionary interest rate shock raises the share of long-term debt by 87 b.p., explaining about 20% of its variation. Moreover, we show that only large, bond-issuing firms adjust. A...