DP4757 | Capital Structure under Imperfect Enforcement

Publication Date

23/11/2004

JEL Code(s)

Keyword(s)

Programme Area(s)

Abstract

Building on a costly state verification framework, we propose a theory of capital structure with imperfect enforcement. In addition to being consistent with stylized facts on the choice of capital structure, it accommodates a range of empirical regularities on the repayment behaviour, such as strategic defaults of debt obligations, costly bankruptcy, investor intervention, and violations of absolute priority rules.