Dynamic Capital Structure and Debt Market Equilibrium

I develop a dynamic capital structure framework in which many firms supply debt without commitment, and debt prices are determined by market clearing. Corporate debt is not a standard asset with fixed supply and exogenous cash flows. Its market valuation affects debt issuance, which in turn affects aggregate debt supply, default risk, and the cash flows delivered by debt. The model shows how debt demand is an important determinant of leverage dynamics and the cross-sectional distribution of leverage. Importantly, stronger debt demand is entirely absorbed by issuance and leads to lower long-run bond prices in equilibrium. I then extend the framework to allow for imperfect substitutability across bonds. Credit rating segmentation generates leverage dynamics around rating boundaries that are consistent with empirical evidence. When investors have preferred habitats, endogenous demand and supply jointly determine maturity premia. Correlation across cash-flow shocks affects the speed of leverage adjustment and can induce firms to repurchase debt optimally.