A Model of Corporate Financing Decisions

Abstract

A Tc temporary capital PCB permanent capital @oak value) Assistant Professor of Finance, Northwestern University. While retaining full responsibility for the final product, the author is indebted to Frank Brechling, Stuart Greenbaum, Jerry Hausman, Franc0 Modigliani, Stewart Myers and Eugene Savin for many helpful suggestions. 1. This balance sheet is meant to illustrate the basic nature of the financing decision. A more complete balance sheet is included with the discussion of the estimates. 1467 1468 The Journal of Finance 2. See [2], [3], [7] and [ 121. 3. Spies uses the "stacking technique," a variant of OM, which allows him to estimate all of his 4. See [16]. equations at once.

Leverage Risk. The Weight of Borrowed Capital Distinguishes the Solvency of Firms: An Empirical Analysis on a Sample of 4,500 Italian SMEs

“…Following this line first suggested by Taggart (1977) and later by Graham (2000), it is clear that crisis costs are undervalued. This is because the historical default rate is much lower than the probability of crisis and, as a result, firms will be considered insufficiently in debt.…”

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