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<p>We use a dynamic model of the firm to study the two constituent parts of debt: the risk-free component, which can always be repaid in full, and the risky component, which implies a potential capital loss for lenders. We find that, under a standard parameterization of the model, the risk-free fraction of debt depends mainly on the operating costs and the bankruptcy costs. Alternatively, the risky fraction of debt depends largely on the elasticity of capital and the variability of cash flows. We also find that, as a proportion of firm value, both components behave counter-cyclically over the business cycle. Finally, a cross-sectional analysis shows that those elements of debt vary widely across U.S. industries.</p>

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Risk-free vs risky components of debt

  • 期刊论文

  • 发表日期：

    2025年2月3日

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  • Amilcar A. Menichini

摘要

We use a dynamic model of the firm to study the two constituent parts of debt: the risk-free component, which can always be repaid in full, and the risky component, which implies a potential capital loss for lenders. We find that, under a standard parameterization of the model, the risk-free fraction of debt depends mainly on the operating costs and the bankruptcy costs. Alternatively, the risky fraction of debt depends largely on the elasticity of capital and the variability of cash flows. We also find that, as a proportion of firm value, both components behave counter-cyclically over the business cycle. Finally, a cross-sectional analysis shows that those elements of debt vary widely across U.S. industries.