Debt Contracts and Stochastic Default Barrier
This article presents structural asset pricing model with stochastic interest rate and default barrier based on the evolution of the firm' Earning Before Interest and Taxes (EBIT). This framework is further enhanced by the game theory analysis which examines the negotiation between shareholders and creditors with respect to the debt of the company and its safety covenants serving as the default trigger. As a result, this complex framework allows toanalyse different optimal capital structures of the company and its default probability dependent on the changes in the risk-free interest rate, which may also represent the current state of the economy. As the numerical computations show this approach is more convenient than the constant default barrier framework used in the currently available literature.
|Date of creation:||Jun 2012|
|Date of revision:||Jun 2012|
|Contact details of provider:|| Postal: |
Phone: +420 2 222112330
Fax: +420 2 22112304
Web page: http://ies.fsv.cuni.cz/Email:
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mella-Barral, Pierre & Perraudin, William, 1997.
" Strategic Debt Service,"
Journal of Finance,
American Finance Association, vol. 52(2), pages 531-56, June.
- Mark H. Lang & Douglas A. Shackelford, 1999.
"Capitalization of Capital Gains Taxes: Evidence from Stock Price Reactions to the 1997 Rate Reduction,"
NBER Working Papers
6885, National Bureau of Economic Research, Inc.
- Lang, Mark H. & Shackelford, Douglas A., 2000. "Capitalization of capital gains taxes: evidence from stock price reactions to the 1997 rate reduction," Journal of Public Economics, Elsevier, vol. 76(1), pages 69-85, April.
- Alex Kane & Alan J. Marcus & Robert L. McDonald, 1985.
"How Big is the Tax Advantage to Debt?,"
NBER Working Papers
1286, National Bureau of Economic Research, Inc.
- Kane, Alex & Marcus, Alan J. & McDonald, Robert L., 1985.
"Debt Policy and the Rate of Return Premium to Leverage,"
Journal of Financial and Quantitative Analysis,
Cambridge University Press, vol. 20(04), pages 479-499, December.
- Alex Kane & Alan J. Marcus & Robert L. McDonald, 1984. "Debt Policy and the Rate of Return Premium to Leverage," NBER Working Papers 1439, National Bureau of Economic Research, Inc.
- Fischer, Edwin O & Heinkel, Robert & Zechner, Josef, 1989. " Dynamic Capital Structure Choice: Theory and Tests," Journal of Finance, American Finance Association, vol. 44(1), pages 19-40, March.
When requesting a correction, please mention this item's handle: RePEc:fau:wpaper:wp2012_17. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lenka Herrmannova)
If references are entirely missing, you can add them using this form.