39 Pages Posted: 19 Mar 2011 Last revised: 19 Mar 2012
Date Written: 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.
Keywords: Q Theory of Investment, Capital Structure, Long Term Debt, Stochastic Volatility
JEL Classification: G30, G32
Suggested Citation: Suggested Citation
Michaux, Michael and Gourio, Francois, Financing Investment with Long-Term Debt and Uncertainty Shocks (February 6, 2012). Available at SSRN: https://ssrn.com/abstract=1786082 or http://dx.doi.org/10.2139/ssrn.1786082