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Financing Investment with Long-Term Debt and Uncertainty Shocks

39 Pages Posted: 19 Mar 2011 Last revised: 19 Mar 2012

Michael Michaux

University of Southern California - Marshall School of Business

Francois Gourio

Federal Reserve Bank of Chicago

Date Written: February 6, 2012

Abstract

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

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

Michael Michaux (Contact Author)

University of Southern California - Marshall School of Business ( email )

Marshall School of Business, FBE
3670 Trousdale Parkway, BRI-308
Los Angeles, CA 90089
United States

HOME PAGE: http://www-bcf.usc.edu/~michaux/

Francois Gourio

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

HOME PAGE: http://sites.google.com/site/fgourio

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