Working Paper: CEPR ID: DP4757
Authors: Hans K. Hvide; Tore Leite
Abstract: Building on a costly state verification framework, we propose a theory of capital structure with imperfect enforcement. In addition to being consistent with stylized facts on the choice of capital structure, it accommodates a range of empirical regularities on the repayment behaviour, such as strategic defaults of debt obligations, costly bankruptcy, investor intervention, and violations of absolute priority rules.
Keywords: cash diversion; costly state verification; financial contracts; outside equity
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| enforcement mechanisms (K40) | capital structure choices (G32) |
| enforcement mechanisms (K40) | repayment behaviors (G51) |
| capital structure choices (G32) | repayment behaviors (G51) |