Post by Sapphire Capital on Aug 16, 2008 22:57:46 GMT 4
The Effect of Investment and Financing Policies on Credit Risk
Andrea Gamba
University of Verona; George Washington School of Business
Mamen Aranda
University of Navarra - Business
July 13, 2008
Abstract:
We investigate the impact on credit risk of endogenous investment and capital structure decisions. To this aim, we propose a realistic dynamic structural model featuring endogenous investment, capital structure and default. We calibrate the model using accounting and market information by fitting the empirical credit risk data for different risk classes. We find that while investment and financing decisions, when made in the interest of all stakeholders, reduce credit risk, they greatly increase credit risk if they are in the best interest of shareholders, and the effect is more significant if investment and financing are jointly decided. Moreover, we find that in presence of dynamic investment/disinvestment decisions, the possibility to adapt capital structure over time in order to benefit from a positive net tax shield and to avoid distress cost is only a minor determinant of credit risk. Similarly, the effect of debt transaction costs on yield spreads is also relatively small when compared to agency costs.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1159447_code327209.pdf?abstractid=1155606&mirid=2
Andrea Gamba
University of Verona; George Washington School of Business
Mamen Aranda
University of Navarra - Business
July 13, 2008
Abstract:
We investigate the impact on credit risk of endogenous investment and capital structure decisions. To this aim, we propose a realistic dynamic structural model featuring endogenous investment, capital structure and default. We calibrate the model using accounting and market information by fitting the empirical credit risk data for different risk classes. We find that while investment and financing decisions, when made in the interest of all stakeholders, reduce credit risk, they greatly increase credit risk if they are in the best interest of shareholders, and the effect is more significant if investment and financing are jointly decided. Moreover, we find that in presence of dynamic investment/disinvestment decisions, the possibility to adapt capital structure over time in order to benefit from a positive net tax shield and to avoid distress cost is only a minor determinant of credit risk. Similarly, the effect of debt transaction costs on yield spreads is also relatively small when compared to agency costs.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1159447_code327209.pdf?abstractid=1155606&mirid=2