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A Theory of Corporate Capital Structure and Investment

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  • Miguel Cantillo.

Abstract

This paper develops a costly state verification (CSV) model which describes how financial fluctuations affect real activity in a general equilibrium setting. In an economy with differentiated lenders, the most efficient will become intermediaries (e.g. banks). Intermediation generally creates frictions which prevent banks from dominating the debt markets. In this model, firms with abundant funds avoid intermediaries, and tap the credit markets directly. Meanwhile, firms with moderate resources borrow from intermediaries. The aggregation of this model produces an economy with appealing features: aggregate investment drops with a rise in the riskless rate, and a deterioration of bank or corporate health.

Suggested Citation

  • Miguel Cantillo., 1995. "A Theory of Corporate Capital Structure and Investment," Research Program in Finance Working Papers RPF-255, University of California at Berkeley.
    • Handle: RePEc:ucb:calbrf:rpf-255
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    Cited by:

    1. Cantillo, Miguel & Wright, Julian, 2000. "How Do Firms Choose Their Lenders? An Empirical Investigation," The Review of Financial Studies, Society for Financial Studies, vol. 13(1), pages 155-189.
    2. Pojanart Sunirand, 2002. "The Role of Bank Capital and The Transmission Mechanism of Monetary Policy," FMG Discussion Papers dp433, Financial Markets Group.
    3. George Emmanuel Iatridis, 2012. "Voluntary IFRS disclosures: evidence from the transition from UK GAAP to IFRSs," Managerial Auditing Journal, Emerald Group Publishing, vol. 27(6), pages 573-597, June.
    4. Sunirand, Pojanart, 2002. "The role of bank capital and the transmission mechanism of monetary policy," LSE Research Online Documents on Economics 24953, London School of Economics and Political Science, LSE Library.
    5. S. Viswanathan & Adriano A. Rampini, 2008. "Collateral, Financial Intermediation, and the Distribution of Debt Capacity," 2008 Meeting Papers 116, Society for Economic Dynamics.
    6. Peter Brusov & Tatiana Filatova & Mukhadin Eskindarov & Pavel Brusov & Natali Orehova & Anastasia Brusova, 2012. "Influence of debt financing on the effectiveness of the finite duration investment project," Applied Financial Economics, Taylor & Francis Journals, vol. 22(13), pages 1043-1052, July.

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