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The authors investigate the impact on credit risk of endogenous investment and capital structure decisions. To this aim, they propose a realistic dynamic structural model featuring endogenous investment, capital structure and default. They calibrate the model using accounting and market information by fitting the empirical credit risk data for different risk classes. They find that while investment and financing decisions, when made in the interest of all stakeholders, reduce credit risk, they greatly increase credit risk if they are in the best interest of shareholders, and the effect is more significant if investment and financing are jointly decided.
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