2009 Fiscal Year Final Research Report
Credit risk and contagion: Continuous-time optimal contract approach
| Project/Area Number |
20730204
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| Research Category |
Grant-in-Aid for Young Scientists (B)
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| Allocation Type | Single-year Grants |
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| Research Field |
Public finance/Monetary economics
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| Research Institution | The University of Tokyo |
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Principal Investigator |
NAKAMURA Hisashi The University of Tokyo, 大学院・経済学研究科, 講師 (80418649)
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| Project Period (FY) |
2008 – 2009
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| Keywords | 信用リスク評価 / 企業再生 / 情報開示 |
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| Research Abstract |
This research project studies the role of restructuring in valuing optimally designed long-term securities in a continuous-time model with costly corporate information disclosure. In practice, Merton (1974)'s contingent-claim models have been long used for valuing corporate securities, based mostly on the assumption of some sufficiently complete security structure in markets. On the other hand, in the literature on corporate finance, it has been well known theoretically and empirically that the agency problem (i.e., conflicts of interest among agents) caused by informational asymmetry distorts corporate capital structure. However, the effect of the distortion on security valuation has not been well studied either in theory or in practice. This paper bridges such a gap between the security-valuation literature and the corporate-finance literature. Specifically, first, it shows that, in the agency problem, corporate leverage ratios are higher when restructuring is expected to be accepted in default than otherwise. Also, they can correlate with equity values negatively inter-temporarily. The risk of a jump to liquidation increases the default probability in short term, and decreases the probability of restructuring over time. As a result, this model can resolve the underestimation problem of short-term credit spreads.
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Research Products
(6 results)
