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Collateral and Capital Structure

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  • S. Viswanathan

    (Duke University)

  • Adriano Rampini

    (Duke University)

Abstract

This paper develops a dynamic model of the capital structure based on the need to collateralize loans with tangible assets. The model provides a unified theory of optimal firm financing in terms of the optimal capital structure, investment, leasing, and risk management policy. Tangible assets are a key determinant of the cross section and dynamic behavior of the capital structure. Firms with low tangible capital are constrained longer, lease more of their physical capital, and borrow less. Leasing of tangible assets enables faster firm growth. The model helps explain the “zero debt puzzle” as well as other stylized facts about the capital structure. For risk management the model implies that incomplete hedging of net worth is optimal.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 525.

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Date of creation: 2009
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Handle: RePEc:red:sed009:525

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References

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Citations

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Cited by:
  1. Daniela Fabbri & Annamaria Menichini, 2012. "The Commitment Problem of Secured Lending," CSEF Working Papers 318, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  2. Markus K. Brunnermeier & Thomas M. Eisenbach & Yuliy Sannikov, 2012. "Macroeconomics with Financial Frictions: A Survey," NBER Working Papers 18102, National Bureau of Economic Research, Inc.
  3. Rampini, Adriano A. & Sufi, Amir & Viswanathan, S., 2014. "Dynamic risk management," Journal of Financial Economics, Elsevier, vol. 111(2), pages 271-296.
  4. Murillo Campello & Erasmo Giambona, 2011. "Capital Structure and the Redeployability of Tangible Assets," Tinbergen Institute Discussion Papers 11-091/2/DSF24, Tinbergen Institute.

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