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Capital Structure, Credit Risk, and Macroeconomic Conditions

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Author Info
Dirk Hackbarth () (Finance Department, Kelley School of Business, University of Indiana)
Jianjun Miao () (Department of Economics, Boston University)
Erwan Morellec () (HEC, University of Lausanne and FAME)

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Abstract

This paper develops a framework for analyzing the impact of macroeceomic conditions on credit risk and dynamic capital structure choice. We begin by observing that when cash flows depend on current economic conditions, there will be a benefit for firms to adapt their default and financing policies to the position of the economy in the business cycle phase. We then demonstrate that this simple observation has a wide range of implications for corporations. Notably, we show that our model can replicate observed debt levels and the countercyclicality of leverage ratios. We also demonstrate that it can reproduce the observed term structure of credit spreads and generate strictly positive credit spreads for very short maturities. Finally, we characterize the impact of macroeconomic conditions on the pace and size of capital structure changes, and debt capacity. A number of new predictions follow.

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Paper provided by International Center for Financial Asset Management and Engineering in its series FAME Research Paper Series with number rp125.

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Date of creation: May 2004
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Handle: RePEc:fam:rpseri:rp125

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Related research
Keywords: Dynamic capital structure; Credit spreads; Macroeconomic conditions;

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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Jianjun Miao, 2005. "Optimal Capital Structure and Industry Dynamics," Journal of Finance, American Finance Association, vol. 60(6), pages 2621-2659, December. [Downloadable!] (restricted)
    Other versions:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jacobson, Tor & Kindell, Rikard & Lindé, Jesper & Roszbach, Kasper F., 2008. "Firm Default and Aggregate Fluctuations," CEPR Discussion Papers 7083, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Hui Chen & Jianjun Miao & Neng Wang, 2009. "Entrepreneurial Finance and Non-diversifiable Risk," NBER Working Papers 14848, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Gady Jacoby & Chuan Liao & Jonathan A. Batten, 2007. "A Pure Test for the Elasticity of Yield Spreads," The Institute for International Integration Studies Discussion Paper Series iiisdp195, IIIS. [Downloadable!]
  4. Acharya, Viral V. & Davydenko, Sergei A. & Strebulaev, Ilya, 2009. "Cash Holdings and Credit Risk," CEPR Discussion Papers 7125, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  5. Wolfgang Drobetz & Gabrielle Wanzenried, 2004. "What Determines the Speed of Adjustment to the Target Capital Structure?," Diskussionsschriften dp0415, Universitaet Bern, Departement Volkswirtschaft. [Downloadable!]
  6. Elsas, Ralf & Florysiak, David, 2008. "Empirical Capital Structure Research: New Ideas, Recent Evidence, and Methodological Issues," Discussion Papers in Business Administration 4743, University of Munich, Munich School of Management. [Downloadable!]
  7. Tang, Dragon Yongjun & Yan, Hong, 2008. "Market conditions, default risk and credit spreads," Discussion Paper Series 2: Banking and Financial Studies 2008,08, Deutsche Bundesbank, Research Centre. [Downloadable!]
  8. Wilson Sy, 2007. "A Causal Framework for Credit Default Theory," Research Paper Series 204, Quantitative Finance Research Centre, University of Technology, Sydney. [Downloadable!]
  9. DÉCAMPS, Jean-Paul & VILLENEUVE, Stéphane, 2008. "On the Modeling of Debt Maturity and Endogenous Default: A Caveat," IDEI Working Papers 528, Institut d'Économie Industrielle (IDEI), Toulouse.
  10. Olfa Maalaoui & Georges Dionne & Pascal François, 2009. "Credit Spread Changes within Switching Regimes," Cahiers de recherche 0905, CIRPEE. [Downloadable!]
  11. Gianni De Nicoló & Senay Agca & Enrica Detragiache, 2007. "Financial Reforms, Financial Openness, and Corporate Borrowing: International Evidence," IMF Working Papers 07/186, International Monetary Fund. [Downloadable!]
  12. Abel Elizalde, 2006. "Credit Risk Models Ii: Structural Models," Working Papers wp2006_0606, CEMFI. [Downloadable!]
  13. Jianjun Miao, 2003. "Optimal Capital Structure and Industry Dynamics," Industrial Organization 0310001, EconWPA. [Downloadable!]
    Other versions:
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