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Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure
, 1976
"... This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the ‘separation and control’ issue, investigate the nature of ..."
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Cited by 898 (5 self)
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This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the ‘separation and control’ issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem.
AN EQUILIBRIUM CHARACTERIZATION OF THE TERM STRUCTURE
, 1977
"... The paper derives a general form of the term structure of interest rates. The following assumptions are made: (A.l) The instantaneous (spot) interest rate follows a diffusion process; (A.2) the price of a discount bond depends only on the spot rate over its term; and (A.3) the market is efficient. U ..."
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Cited by 603 (0 self)
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The paper derives a general form of the term structure of interest rates. The following assumptions are made: (A.l) The instantaneous (spot) interest rate follows a diffusion process; (A.2) the price of a discount bond depends only on the spot rate over its term; and (A.3) the market is efficient. Under these assumptions, it is shown by means of an arbitrage argument that the expected rate of return on any bond in excess of the spot rate is proportional to its standard deviation. This property is then used to derive a partial differential equation for bond prices. The solution to that equation is given in the form of a stochastic integral representation. An interpretation of the bond pricing formula is provided. The model is illustrated on a specific case.
Modeling Term Structures of Defaultable Bonds
, 1999
"... This article presents convenient reducedform models of the valuation of contingent claims subject to default risk, focusing on applications to the term structure of interest rates for corporate or sovereign bonds. Examples include the valuation of a creditspread option ..."
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Cited by 423 (23 self)
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This article presents convenient reducedform models of the valuation of contingent claims subject to default risk, focusing on applications to the term structure of interest rates for corporate or sovereign bonds. Examples include the valuation of a creditspread option
Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads
 THE JOURNAL OF FINANCE, VOL. 51, NO. 3, PAPERS AND PROCEEDINGS OF THE FIFTYSIXTH
, 1996
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A Markov Model for the Term Structure of Credit Risk Spreads
 Review of Financial Studies
, 1997
"... This article provides a Markov model for the term structure of credit risk spreads. The model is based on Jarrow and Turnbull (1995), with the bankruptcy process following a discrete state space Markov chain in credit ratings. The parameters of this process are easily estimated using observable data ..."
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Cited by 237 (12 self)
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This article provides a Markov model for the term structure of credit risk spreads. The model is based on Jarrow and Turnbull (1995), with the bankruptcy process following a discrete state space Markov chain in credit ratings. The parameters of this process are easily estimated using observable data. This model is useful for pricing and hedging corporate debt with imbedded options, for pricing and hedging OTC derivatives with counterparty risk, for pricing and hedging (foreign) government bonds subject to default risk (e.g., municipal bonds), for pricing and hedging credit derivatives, and for risk management. This article presents a simple model for valuing risky debt that explicitly incorporates a firm's credit rating as an indicator of the likelihood of default. As such, this article presents an arbitragefree model for the term structure of credit risk spreads and their evolution through time. This model will prove useful for the pricing and hedging of corporate debt with We would like to thank John Tierney of Lehman Brothers for providing the bond index price data, and Tal Schwartz for computational assistance. We would also like to acknowledge helpful comments received from an anonymous referee. Send all correspondence to Robert A. Jarrow, Johnson Graduate School of Management, Cornell University, Ithaca, NY 14853. The Review of Financial Studies Summer 1997 Vol. 10, No. 2, pp. 481523 1997 The Review of Financial Studies 08939454/97/$1.50 imbedded options, for the pricing and hedging of OTC derivatives with counterparty risk, for the pricing and hedging of (foreign) government bonds subject to default risk (e.g., municipal bonds), and for the pricing and hedging of credit derivatives (e.g. credit sensitive notes and spread adjusted notes). This model can also...
The Determinants of Credit Spread Changes
, 2001
"... Using dealer’s quotes and transactions prices on straight industrial bonds, we investigate the determinants of credit spread changes. Variables that should in theory determine credit spread changes have rather limited explanatory power. Further, the residuals from this regression are highly crossco ..."
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Cited by 224 (2 self)
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Using dealer’s quotes and transactions prices on straight industrial bonds, we investigate the determinants of credit spread changes. Variables that should in theory determine credit spread changes have rather limited explanatory power. Further, the residuals from this regression are highly crosscorrelated, and principal components analysis implies they are mostly driven by a single common factor. Although we consider several macroeconomic and financial variables as candidate proxies, we cannot explain this common systematic component. Our results suggest that monthly credit spread changes are principally driven by local supply0 demand shocks that are independent of both creditrisk factors and standard proxies for liquidity.
An Analytic Derivation of the Cost of Deposit Insurance and Loan Guarantees: An Application of Modern Option Pricing Theory
 Journal of Banking and Finance
, 1977
"... It is not uncommon in the arrangement of a loan to include as part of the financial package a guarantee of the loan by a third party. Examples are guarantees by a parent company of loans made to its subsidiaries or government guarantees of loans made to private corporations. Also included would be g ..."
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Cited by 217 (2 self)
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It is not uncommon in the arrangement of a loan to include as part of the financial package a guarantee of the loan by a third party. Examples are guarantees by a parent company of loans made to its subsidiaries or government guarantees of loans made to private corporations. Also included would be guarantees of bank deposits by the Federal Deposit Insurance Corporation. As with other forms of insurance, the issuing of a guarantee imposes a liability or cost on the guarantor. In this paper, a formula is derived to evaluate this cost. The method used is to demonstrate an isomorphic correspondence between loan guarantees and common stock put options, and then to use the well developed theory of option pricing to derive the formula. 1.
Explaining the rate spread on corporate bonds
 Journal of Finance
, 2001
"... The purpose of this article is to explain the spread between spot rates on corporate and government bonds. We find that the spread can be explained in terms of three elements: (1) compensation for expected default of corporate bonds (2) compensation for state taxes since holders of corporate bonds p ..."
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Cited by 207 (3 self)
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The purpose of this article is to explain the spread between spot rates on corporate and government bonds. We find that the spread can be explained in terms of three elements: (1) compensation for expected default of corporate bonds (2) compensation for state taxes since holders of corporate bonds pay state taxes while holders of government bonds do not, and (3) compensation for the additional systematic risk in corporate bond returns relative to government bond returns. The systematic nature of corporate bond return is shown by relating that part of the spread which is not due to expected default or taxes to a set of variables which have been shown to effect risk premiums in stock markets Empirical estimates of the size of each of these three components are provided in the paper. We stress the tax effects because it has been ignored in all previous studies of corporate bonds. 1
Term structures of credit spreads with incomplete accounting information
 Econometrica
, 2001
"... Abstract: We study the implications of imperfect information for term structures of credit spreads on corporate bonds. We suppose that bond investors cannot observe the issuer’s assets directly, and receive instead only periodic and imperfect accounting reports. For a setting in which the assets of ..."
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Cited by 188 (10 self)
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Abstract: We study the implications of imperfect information for term structures of credit spreads on corporate bonds. We suppose that bond investors cannot observe the issuer’s assets directly, and receive instead only periodic and imperfect accounting reports. For a setting in which the assets of the firm are a geometric Brownian motion until informed equityholders optimally liquidate, we derive the conditional distribution of the assets, given accounting data and survivorship. Contrary to the perfectinformation case, there exists a defaultarrival intensity process. That intensity is calculated in terms of the conditional distribution of assets. Credit yield spreads are characterized in terms of accounting information. Generalizations are provided. 1 We are exceptionally grateful to Michael Harrison for his significant contributions to this paper, which are noted within. We are also grateful for insightful research assistance