Financing Investment with Long-Term Debt and Uncertainty Shocks
University of Southern California - Marshall School of Business
February 6, 2012
We extend the quantitative corporate finance framework of Hennessy and Whited (2005) by introducing long-term defaultable debt and stochastic volatility. These features lead to significantly lower leverage and higher default probabilities, and a stronger negative correlation of investment with credit spreads, consistent with the data.
Number of Pages in PDF File: 39
Keywords: Q Theory of Investment, Capital Structure, Long Term Debt, Stochastic Volatility
JEL Classification: G30, G32
Date posted: March 19, 2011 ; Last revised: March 19, 2012
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