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Market Imperfections, Investment Flexibility, and Default Spreads
Author(s) -
Titman Sheridan,
Tompaidis Stathis,
Tsyplakov Sergey
Publication year - 2004
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2004.00630.x
Subject(s) - commit , collateral , flexibility (engineering) , investment (military) , debt , monetary economics , economics , incentive , value (mathematics) , microeconomics , capital market imperfections , business , finance , capital market , computer science , management , politics , political science , law , database , machine learning
This paper develops a structural model that determines default spreads in a setting where the debt's collateral is endogenously determined by the borrower's investment choice, and a demand variable with permanent and temporary components. We also consider the possibility that the borrower cannot commit to taking the value‐maximizing investment choice, and may, in addition, be constrained in its ability to raise external capital. Based on a model calibrated to data on office buildings and commercial mortgages, we present numerical simulations that quantify the extent to which investment flexibility, incentive problems, and credit constraints affect default spreads.