Physical capital is often specific to a certain task and/or fixed to a particular location. These specificities imply that physical capital markets are subject to potentially important allocation frictions. Most of the modern macro literature has ignored these market imperfections and examined instead the effects of aggregate investment constraints such as time&to&build delays (e.g. Kydland and Prescott, 1982) or convex adjustment costs (e.g. Cogley and Nason, 1995).
The general conclusion from this literature is that in general equilibrium, such aggregate investment constraints have relatively small business cycle effects on their own. In this paper, we investigate whether the same holds true for market imperfections. In particular, we introduce search frictions for the allocation of physical capital into an otherwise standard real business cycle (RBC) model and ask whether these imperfections help generate more amplified and persistent responses to small exogenous shocks.
The empirical tests for structural models of credit risk have been unsuccessful. Rather strict estimation or calibration reveals that the predicted credit spread is far below the observed ones (Jones et al., 1984), the structural variables explain very little of the credit spread variation (Huang and Huang, 2003), or the pricing error is very large for corporate bonds (Eom et al., 2004). More flexible regression analysis, although confirming the validity of the cross-sectional or long-run factors in predicting the bond spread, suggests that the explaining power of default risk factors for credit spread is still very small (Collin-Dufresne et al., 2001), the temporal changes of bond spread is not directly related to expected default loss (Elton et al., 2001), or the forecasting power of long-run volatility cannot be reconciled with the classical Merton (1974) model (Campbell and Taksler, 2003). These negative findings are robust to the extensions of stochastic interest rates (Longstaff and Schwartz, 1995), endogenously determined default boundaries (Leland, 1994; Leland and Toft, 1996), strategic defaults (Anderson et al., 1996; Mella-Barral and Perraudin, 1997), and mean-reverting leverage ratios (Collin-Dufresne and Goldstein, 2001).
It is well known that angel financing is an important source of financing for private firms in the United States. However, beyond the fact that the annual amount of angel financing is much larger than that of venture capital financing, and that angels tend to be individuals who invest much smaller amounts than venture capitalists in individual firms, little is known about the important economic differences between venture capital and angel financing.
