The Term Structure of Capital Costs by Qiheng Guo (PSTAT)

Event Date: 

Monday, November 26, 2018 - 3:30pm to 4:30pm

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.