Capital Structure, Investment, and Fire Sales

Abstract

We study a dynamic general equilibrium model in which firms choose their investment level and their capital structure, trading off the tax advantages of debt against the risk of costly default. The costs of bankruptcy are endogenously determined, as bankrupt firms are forced to liquidate their assets, resulting in a fire sale if the market is illiquid. When the corporate income tax rate is positive, firms have a unique optimal capital structure. In equilibrium firms default with positive probability and their assets are liquidated at fire-sale prices. The equilibrium not only features underinvestment but is also constrained inefficient. In particular there is too little debt and too little default.Keywords: Debt, equity, capital structure, default, market liquidity, constrained inefficiency, incomplete markets All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means without the prior permission in writing of the publisher nor be issued to the public or circulated in any form other than that in which it is published.Requests for permission to reproduce any article or part of the Working Paper should be sent to the editor at the above address. The equilibrium not only features underinvestment but is also constrained inefficient. In particular there is too little debt and too little default.JEL Nos: D5, D6, G32, G33

Fire Sale Bank Recapitalizations

“…The constrained inefficiency results in Gale and Gottardi (2015) and in our paper are related to the work of Lorenzoni (2008). Whilst Lorenzoni's borrowing constraint depends on asset prices and affect leverage directly, however, our paper features a recapitalization constraint that is essentially a solvency constraint depending on leverage and on equity market conditions.…”

“…In contrast to the classical model of Modigliani and Miller (1958), markets in our model are incomplete, implying that banks with a level of portfolio risk that is too high are subject to creditor runs and insolvency; as a result, the optimal capital structure is determinate. While we analyze the capital structure of banks and the implications on macroprudential regulation, a related paper by Gale and Gottardi (2015) studies a dynamic general equilibrium model where firms choose their capital structure and investments, trading off tax advantages of debt with the risk of costly default. In their paper with fire sales of assets, the equilibrium exhibits inefficient under-investment, because firms do not internalize that an increased use of debt by all firms can lower their tax burden.…”

Costs of insolvency: Types and estimation approaches

“…3 перечислены основные модельные исследования структуры капитала, в которых рассматриваются издержки несостоятельности. Снижение ценности активов при ликвидации компании [Kalaba et al, 1984;Leland, 1994;Miao, 2005;Nivorozhkin, 2005a;2005b;Uhrig-Homburg, 2005;Hennessy, Whited, 2007;Titman, Tsyplakov, 2007;Tsyplakov, 2008;Gryglewicz, 2011;Nejadmalayeri, Singh, 2012;Dudley, 2012;Elkamhi, Ericsson, Parsons, 2012;Koziol, 2014;Sundaresan, Wang, Yang, 2014;Christensen et al, 2014;Xiang, Yang, 2015;Elliott, Shen, 2015;Gale, Gottardi, 2015;Correia, Población, 2015;Glover, 2016;Agliardi, Amel-Zadeh, Koussis, 2016] Издержки привлечения дополнительного акционерного финансирования [Uhrig-Homburg, 2005;Hennessy, Whited, 2007;Titman, Tsyplakov, 2007;Dudley, 2012;Dannis, Rettl, Whited, 2014] Снижение операционного денежного потока или прибыли [Hackbarth, Hennessy, Leland, 2007;Titman, Tsyplakov, 2007;Dannis, Rettl, Whited, 2014;Correa, Población, 2015;Gale, Gottardi, 2015] Убытки при продаже активов [Hennessy, Whited, 2007;Gale, Gottardi, 2015] Издержки реструктуризации долга [Titman, Tsyplakov, 2007;Tsyplakov, 2008;Elkamhi, Ericsson, Parsons, 2012;Karpavicius, 2014] Утрата права на перенос убытков на будущее…”

“…Исследование рынка активов корпораций-банкротов в США продемонстрировало, что прибыльность компаний, действующих в той же отрасли, что и несостоятельные компании, и приобретающих такие активы, превышает среднюю [Jory, Madura, 2009]. Даже в случае возможности использования активов компаниями той же отрасли при процедуре банкротства они реализуются с существенным дисконтом, о чем свидетельствуют результаты модельных исследований [Gale, Gottardi, 2015].…”

Securitization and Aggregate Investment Efficiency

“…In contrast, this paper focuses on the general equilibrium impacts of securitized lending and the associated welfare implications. Gale and Gottardi (2015) also examine the impact of pecuniary externalities on ex-ante capital structure of intermediaries. Debt is preferable to equity in their model due to tax advantages, and they identify the impact of fire-sales by bankrupt firms on the ex-ante capital structure.…”