Capital Structure and Assets: Effects of an Implicit Collateral

This paper analyses a firm's capital structure choice when assets have outside value. Valuable assets implicitly provide a collateral and increase tax shield exploitation. The key feature in this paper is asset value uncertainty, implying that it is unknown ex ante whether the equity holders ex post optimally sell the assets or re‐optimise the capital structure. Ex ante, more uncertain asset value decreases leverage, but not firm value, and selling the assets becomes less likely. Firms should tend to invest in assets whose value is less correlated to changes in earnings and, in addition, asset sales are less likely when this correlation is low.     

Institutions and Bank Behavior: Legal Environment,Legal Perception,and the Composition of Bank Lending

This paper explores how the legal environment affects bank behavior in 20 transition economies. Based on a newly constructed data set we find that banks’ loan portfolio composition depends on the legal environment. If banks operate in a well‐functioning legal environment they lend relatively more to SMEs and provide more mortgages. On the other hand, banks lend more to large enterprises and to the government if the legal system is unsound. As a transmission channel we identify the banks’ willingness to accept collateral which depends on the bankers’ perceptions of the prevailing laws regarding collateral.     

Relationship Banking and Loan Syndicate Structure: The Role of Private Equity Sponsors

Using a sample of syndicated loans to private equity (PE)‐backed initial public offering companies, we examine how a third‐party bank relationship influences the syndicate structure of a loan. We find that a stronger relationship between the lead bank and the borrower's PE firm enables the lead bank to retain a smaller share of the loan and form a larger and less concentrated syndicate, especially when the borrower is less transparent. A stronger PE‐bank relationship also attracts greater foreign bank participation. Our findings suggest that the lead bank's relationship with a large equity holder of the borrower facilitates information production in lending.     

The Effects of Reversible Investment on Capital Structure and Credit Risks

We propose a structural model with an optimal switching of diffusion regimes that integrates a wide range of investment reversibility. The default boundary and switching thresholds are endogenously determined, and they enable us to comprehend the interrelated problems of the investment decision, capital structure, and credit risks. We examine not only the under/overinvestment but also the under/overdisinvestment. The leverage ratio decreases when the firm has an option to invest in a reversible project, which can alleviate the capital structure puzzle. Furthermore, the model significantly reduces the wide dispersion of yield spreads depending on the credit grade of bonds.