Thesis (Ph. D.)--University of Washington, 2001. / Vita. Includes bibliographical references (leaves 120-125).

published_or_final_version / Business Administration / Master / Master of Business Administration

This work develops some simple models to study risky corporate debt using first passage-time approach. Analytical valuation expression derived from different models as functions of firm’s values and the short-term interest rate with time-dependent parameters governing the dynamics of the firm values and interest rate. We develop some numerical approximation of the analytical valuation, which is given implicitly through Voltera integral equation related to the density of the first-passage- time that a firm reaches some specified default barrier. For some appropriate default barrier arising from financial considerations we obtain a closed-form solution, which is more flexible for numerical calculation.

This thesis contains three essays. In the first essay, I provide new evidence on the failure of the Q theory of investment. The Q theory implies the state-by-state equivalence of stock returns and investment returns. However in the data, I find that investment and stock returns are negatively correlated. I also show that a production economy with time-to-build can explain these empirical facts. When I compute Q theory based investment returns on simulated data of the time-to-build model, they are uncorrelated with simulated stock returns, as in the data. Moreover, the model replicates the empirical negative correlation between stock returns and investment growth which some researchers have interpreted as evidence for irrational markets. In the second essay, I analyze the equilibrium effects of investment commitment on asset prices when the representative consumer has Epstein-Zin utility. Investment commitment captures the idea that long-term investment projects require not only current expenditures but also commitment to future expenditures. The general equilibrium effects of investment commitment and Epstein-Zin preferences generate endogenously time-varying first and second moments of consumption growth and stock returns. As a result, the first and second moments of excess returns are endogenously counter-cyclical, excess returns are predictable, and the equity premium increases by an order of magnitude. This paper also offers novel empirical findings regarding the predictability of returns. In the real and simulated data, the lagged investment rate helps to forecast the mean and volatility of returns. In the third essay, we embed a structural model of credit risk inside a consumption based model, which allows us to price equity and corporate debt in a single framework. Our key economic assumptions are that the first and second moments of earnings and consumption growth depend on the state of the economy which switches randomly, creating intertemporal risk, which agents prefer to resolve quickly because they have Epstein- Zin-Weil preferences. Our model generates co-movement between aggregate stock return volatility and credit spreads, consistent with the data, and potentially resolves the equity risk premium and credit spread puzzles.

Financial crises in East Asia, Russia, and Latin America have caused some to wonder if there is something inherently unstable about financial markets that thwarts their ability to allocate capital appropriate^- and ultimately causes these crises. I build a multi-period, industry-level credit model in which debt-financed entrepreneurs develop homogeneous projects with long gestation periods, sequential investment requirements, and no intermediate cash flows. Entrepreneurs accumulate private signals about terminal demand, and if the signals are bad enough, may decide to halt project development before completion. The prevalence of project suspensions aggregates information and permits the industry size to adjust to the true state of terminal demand. Debt contracts depend upon the pricing power of the creditor; these contracts impact the size of the industry and the timing of the information aggregation. When demand realisations are poor, some investors will be disappointed ex post; aggregate disappointment will depend upon how long the investment behaviour has carried on before suspensions occur, and how large the industry is. I interpret situations of substantial aggregate disappointment as a 'crisis'. Principal results relate to the impact of debt finance on the timing and likelihood of project suspensions. With all equity (self) financing, suspensions will typically be observed, but they may occur relatively late in the game. In contrast, debt finance may lead to very rapid suspensions, depending upon the tools allocated to the creditor. When creditors exercise monopoly control over credit allocation and pricing, profit-maximising creditors can and will force suspensions. This may involve reducing the entrepreneurs' equity contribution and / or subsidizing credit in order to ensure entrepreneurial participation. When credit markets are competitive, creditors lack the pricing power that can be used to structure credit policies that force early suspensions. As debt accumulates and the entrepreneurs' share of liquidation proceeds dwindles, entrepreneurs may not voluntarily suspend operations as this will lead to loss of private benefits. Therefore, there may be no suspensions observed in equilibrium. This problem will be particularly acute when the entrepreneurs' initial equit)' stake is small.

This thesis contains three essays. In the first essay, I provide new evidence on the failure of the Q theory of investment. The Q theory implies the state-by-state equivalence of stock returns and investment returns. However in the data, I find that investment and stock returns are negatively correlated. I also show that a production economy with time-to-build can explain these empirical facts. When I compute Q theory based investment returns on simulated data of the time-to-build model, they are uncorrelated with simulated stock returns, as in the data. Moreover, the model replicates the empirical negative correlation between stock returns and investment growth which some researchers have interpreted as evidence for irrational markets. In the second essay, I analyze the equilibrium effects of investment commitment on asset prices when the representative consumer has Epstein-Zin utility. Investment commitment captures the idea that long-term investment projects require not only current expenditures but also commitment to future expenditures. The general equilibrium effects of investment commitment and Epstein-Zin preferences generate endogenously time-varying first and second moments of consumption growth and stock returns. As a result, the first and second moments of excess returns are endogenously counter-cyclical, excess returns are predictable, and the equity premium increases by an order of magnitude. This paper also offers novel empirical findings regarding the predictability of returns. In the real and simulated data, the lagged investment rate helps to forecast the mean and volatility of returns. In the third essay, we embed a structural model of credit risk inside a consumption based model, which allows us to price equity and corporate debt in a single framework. Our key economic assumptions are that the first and second moments of earnings and consumption growth depend on the state of the economy which switches randomly, creating intertemporal risk, which agents prefer to resolve quickly because they have Epstein- Zin-Weil preferences. Our model generates co-movement between aggregate stock return volatility and credit spreads, consistent with the data, and potentially resolves the equity risk premium and credit spread puzzles.

No abstract available. / Thesis (MBA)-University of Natal, Durban, 2001.

The common justification, in financial theory, for the existence of debt covenants is their use as contractual devices that reduce agency problems between borrowers and lenders. The thesis first examines the extent to which debt covenants alleviate these agency problems, and how they affect a borrower's debt financing decisions. Then, building on recent theories on the costs of bank financing, the dissertation suggests a new economic rationale for debt covenants as instruments that can reduce these costs. The thesis consists of three essays: / The first essay shows that, debt covenants create underinvestment incentives while reducing the overinvestment cost of debt It also finds that the borrower's choice between different contracts with, and without covenants, depends on the magnitude of the agency problems, and the quality of the lender's monitoring technology. / The second essay shows how debt covenants reduce the costs of banks information monopoly. In fact, contingent contracting with debt covenants can be used by banks to precommit against using their informational advantage to hold up borrowers and extract rents, thus giving borrowers incentives to exert greater effort. / The third essay shows that the renegotiation that debt covenants permit, can reduce liquidity risk defined as the risk that a solvent but illiquid borrower is unable to obtain refinancing. It also shows that a debt contract with covenants is similar to a mix of debt contracts with different maturities. / The thesis concludes with a review of the determinants of corporate debt maturity structure, and the literature on corporate reliance on bank financing and suggests future research in this area.

Thesis (Ph.D.)--York University, 2007. Graduate Programme in Business Administration. / Typescript. Includes bibliographical references (leaves182-191). Also available on the Internet. MODE OF ACCESS via web browser by entering the following URL: http://gateway.proquest.com/openurl?url_ver=Z39.88-2004&res_dat=xri:pqdiss&rft_val_fmt=info:ofi/fmt:kev:mtx:dissertation&rft_dat=xri:pqdiss:NR32049

Thesis (Ph. D.)--University of California, San Diego, 2006. / Title from first page of PDF file (viewed June 26, 2006). Available via ProQuest Digital Dissertations. Vita. Includes bibliographical references (p. 113-117).