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    On the effect of the term structure of interest rates on corporate capital structure: Theory and evidence

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    Author
    Nejadmalayeri, Ali
    Issue Date
    2001
    Keywords
    Economics, Finance.
    Economics, Theory.
    Business Administration, Banking.
    Advisor
    Lamoureux, Christopher G.
    
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    Show full item record
    Publisher
    The University of Arizona.
    Rights
    Copyright © is held by the author. Digital access to this material is made possible by the University Libraries, University of Arizona. Further transmission, reproduction or presentation (such as public display or performance) of protected items is prohibited except with permission of the author.
    Abstract
    This manuscript studies the impact of the term structure of interest rates on corporate optimal capital structure. First, I develop a dynamic model of capital structure in the presence of stochastic cash flows and stochastic interest rates. Using one-factor and two-factor Cox, Ingersoll, and Ross (1985b) interest rates dynamic, as well as a one-factor Feller cash flow process, the article solves for the value of the firm's contingent claims. After deriving closed-form solutions for the values of debt, tax benefits, bankruptcy costs and recapitalization costs, the paper numerically solves for the optimal total capital structure: leverage, debt service, maturity, call provisions and priority. I find that as the instantaneous rate rises, so does the leverage, maturity and periodic debt service. I also find that an increase in the level of long-term rate leads to a decrease in leverage, maturity and periodic debt service. In an attempt to understand the effect of macroeconomic conditions on corporate financing decisions, this manuscript then empirically investigates the effect of the term structure of interest rates--defined by a three-factor model which includes the Treasury bill yield, the Treasury bond yield, and the volatility of the yield curve--on the debt-equity choice. Having controlled for well-known microeconomic determinants of financing decisions, I document that as the Treasury bill yield rises, the incidence of debt financing increases. However, as the Treasury bond yield or the volatility of the yield curve rise, the incidence of debt financing drops. I find that the information content of the term structure of interest rates regarding aggregate corporate profitability (i.e. aggregate default risk) accounts for the stylized facts. I also find that tax shield distortions induced by changes of interest rates marginally affect the debt-equity choice. Additionally, inflation, corporate credit spreads, mortgage rates, and personal tax rates materially are shown to affect the firm's financing decisions materially.
    Type
    text
    Dissertation-Reproduction (electronic)
    Degree Name
    Ph.D.
    Degree Level
    doctoral
    Degree Program
    Graduate College
    Industrial Management
    Degree Grantor
    University of Arizona
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