Title: The Term Structure of Capital Costs
Speaker: Steve (Qiheng) Guo, Visiting Assistant Professor, PSTAT
Abstract: We develop a dynamic proﬁt maximization model for a ﬁnancial institution with liabilities of varying maturity, and use it for determining the term structure of capital costs. As a key contribution, our theoretical, numerical, and empirical results show that liabilities with different terms are assessed differently, depending on the company’s ﬁnancial situation. In particular, we ﬁnd that for a ﬁnancially constrained ﬁrm,value-adjustments due to ﬁnancial frictions for liabilities in the far future are less pronounced than for short-term obligations, resulting in a strongly downward sloping term structure. Our ﬁndings provide guidance for performance measurement in ﬁnancial institutions.