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Essays on structural models in corporate finance

University of British Columbia

This thesis contains two essays in Structural Corporate Finance. The first essay studies the effect of asset redeployability on the cross-section of firms’ financial leverage and credit spreads. Particularly, I show that in the data firms’ ability to sell assets — captured by a novel measure of asset redeployability — correlates positively with financial leverage, and negatively with credit spreads. At odds with traditional notions of asset redeployability, I show that these predictions remain even after controlling for proxies of creditors’ recovery rates. To understand these empirical findings, I build a quantitative model where firms’ asset redeployability decreases the degree of investment irreversibility and deadweight cost of bankruptcy. According to the model, while higher overall asset redeployability predicts larger financial leverage and lower credit spread; these relations are mainly driven by differences in the degree of investment irreversibility across firms. Also, within the model, differences in recovery rates are mainly explained by differences in deadweight costs of bankruptcy. Based on these results, I conclude that the link between firms’ asset redeployability and disinvestment flexibilities is key to understand the empirical ability of asset redeployability to predict financial leverage and credit spreads. The second essay provides new evidence about the cross-sectional distribution of debt issuance: its dispersion is highly procyclical. Furthermore, I show that this dynamic feature is mainly driven by large adjustments of the stock of debt and capital observed in good times. Previous research has highlighted the role of non-convex rigidities on inducing large adjustments on firms decisions. Then, to quantify the contribution of real and financial non-convex frictions on shaping the dynamic of the debt issuance cross-sectional distribution, I build a quantitative model where firms take investment and financing decisions. According to the model, both real and financial non-convex frictions are required to reproduce the dynamic of the cross-sectional dispersion of debt issuance. Indeed, the presence of these frictions makes firms’ decisions less responsive during recessions. Yet, in booms, both non-convex costs induce large adjustment on the capital and debt stock of high-growth firms.

Text

2017-08-08

Attribution-NonCommercial-NoDerivatives 4.0 International

http://hdl.handle.net/2429/62508

Business Administration - Finance

University of British Columbia

UBCV

http://creativecommons.org/licenses/by-nc-nd/4.0/