Discussion paper

DP4757 Capital Structure under Imperfect Enforcement

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.


Hvide, H and T Leite (2004), ‘DP4757 Capital Structure under Imperfect Enforcement‘, CEPR Discussion Paper No. 4757. CEPR Press, Paris & London. https://cepr.org/publications/dp4757