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Contracting Costs and the Window of Opportunity for Straight Debt Issues


  • Krishnaswami, Sudha

    (University of New Orleans)

  • Yaman, Devrim

    (Western Michigan University)


We analyze whether fluctuation in economy-wide factors cause time-series variation in the contracting costs of moral hazard, adverse selection, and financial distress, and so create windows of opportunity for firms to issue debt. Using the announcement period abnormal returns as one measure of the overall contracting costs of debt issues, we specifically study whether economy-wide factors affect the impact of firm-specific measures of contracting costs on the abnormal returns. We find that debt issues are more costly in periods of higher interest rates and in industry downturns. When we partition the impact of each issue- and firm-specific measure of contracting costs across high and low levels of each economy-wide variable, we find that only the measures of agency cost become significant in general, but issue-specific measures of financial distress also become relevant in subsamples.

Suggested Citation

  • Krishnaswami, Sudha & Yaman, Devrim, 2005. "Contracting Costs and the Window of Opportunity for Straight Debt Issues," Working Papers 2005-11, University of New Orleans, Department of Economics and Finance.
  • Handle: RePEc:uno:wpaper:2005-11

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    References listed on IDEAS

    1. Carlstrom, Charles T. & Fuerst, Timothy S., 2004. "Learning and the central bank," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 327-338, March.
    2. Bullard, James & Mitra, Kaushik, 2002. "Learning about monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1105-1129, September.
    3. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    4. Bennett T. McCallum & Edward Nelson, 2004. "Timeless perspective vs. discretionary monetary policy in forward-looking models," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 43-56.
    5. Michael Woodford, 1999. "Optimal monetary policy inertia," Proceedings, Federal Reserve Bank of San Francisco.
    6. Ben S. Bernanke & Michael Woodford, 1997. "Inflation forecasts and monetary policy," Proceedings, Federal Reserve Bank of Cleveland, pages 653-686.
    7. Marc Giannoni & Michael Woodford, 2003. "How forward-looking is optimal monetary policy?," Proceedings, Federal Reserve Bank of Cleveland, pages 1425-1483.
    8. George W. Evans & Seppo Honkapohja, 2006. "Monetary Policy, Expectations and Commitment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(1), pages 15-38, March.
    9. Honkapohja, Seppo & Mitra, Kaushik, 2004. "Are non-fundamental equilibria learnable in models of monetary policy?," Journal of Monetary Economics, Elsevier, vol. 51(8), pages 1743-1770, November.
    10. Honkapohja, Seppo & Mitra, Kaushik, 2005. "Performance of monetary policy with internal central bank forecasting," Journal of Economic Dynamics and Control, Elsevier, vol. 29(4), pages 627-658, April.
    11. Berardi, Michele, 2008. "Should monetary policy respond to private sector expectations?," MPRA Paper 19285, University Library of Munich, Germany.
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    More about this item


    Straight debt; Contracting costs; Moral hazard; Financial distress; Adverse selection;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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