Figure 3
Changes in Volatility of Idiosyncratic Risk
Default Productivity Threshold
Probability of Default
Leverage (logarithmic scale)
Leverage (logarithmic scale)
External Finance Premium
Credit Spread
Percentage Points
Percentage Points
Note. Bankruptcy cost parameter (μ) is set equal to 0.12. The external finance premium and the credit
spread are measured relative to a risk-free rate of 3 percent.
11
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