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research article

Credit market frictions and capital structure dynamics

Hugonnier, Julien  
•
Malamud, Semyon  
•
Morellec, Erwan  
2015
Journal of Economic Theory

We study the implications of credit market frictions for the dynamics of corporate capital structure and the risk of default of corporations. To do so, we develop a dynamic capital structure model in which firms face uncertainty regarding their ability to raise funds in credit markets and have to search for investors when seeking to adjust their capital structure. We provide a general analysis of shareholders' dynamic financing and default decisions, show when Markov perfect equilibria in financing and default barrier strategies exist, and when uniqueness can be achieved. We then use the model to generate a number of novel testable implications relating credit market frictions to target leverage, the pace and size of capital structure changes, creditor turnover, and the likelihood of default. (c) 2014 Elsevier Inc. All rights reserved.

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Type
research article
DOI
10.1016/j.jet.2014.09.021
Web of Science ID

WOS:000354593000044

Author(s)
Hugonnier, Julien  
•
Malamud, Semyon  
•
Morellec, Erwan  
Date Issued

2015

Published in
Journal of Economic Theory
Volume

157

Start page

1130

End page

1158

Subjects

Credit supply uncertainty

•

Dynamic capital structure

•

Default risk

•

Search and bargaining

Peer reviewed

REVIEWED

Written at

EPFL

EPFL units
SFI-JH  
SFI-EM  
SFI-SM  
Available on Infoscience
September 28, 2015
Use this identifier to reference this record
https://infoscience.epfl.ch/handle/20.500.14299/119444
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