Capital structure leverage american economic association. Contingent debt and performance pricing in an optimal. Optimal security design and dynamic capital structure in a. In that paper, they study a dynamic compensation and capital structure model in which the agent controls both the drift effort and the volatility project selection of the firm value.
This is unlike previous studies in the capital structure literature that have used static analysis. Request pdf dynamic model of optimal capital structure. The main contribution is the application of a dynamic capital structure model where optimal level as well as the speed at which observed level adjusts towards. By utilizing a framework that provides for the determination of adjustment costs, the results reveal the existence of dynamic adjustment to optimal capital structure suggesting attempts made by the sampled firms to maximize shareholders wealth. Optimal security design and dynamic capital structure in a continuoustime agency model peter m. Analytic solutions for the value of debt and equity are provided when the firm has the opportunity to issue new debt optimally at maturity of current debt. No 549, 2004 meeting papers from society for economic dynamics. An optimal capital structure is the best debttoequity ratio for a firm that maximizes its value. Sergey and titman, sheridan, a dynamic model of optimal capital structure.
This paper provides evidence for another, more fundamental, dark side of irr. We assume that early on in the production process, outside investors face an information friction with respect to withdrawing. Compared with leland 1994, my model features a debtoverhang. Based on a dynamic model of optimal capital structure with endogenous bankruptcy trigger and. As is standard in capital structure models, the equityholders internalize the inefficiency of their expost optimal bankruptcy procedure when they issue debt. In the model, firms make financing, investment, entry, and exit decisions subject to idiosyncratic technology shocks. Section 3 describes our optimal capital structure model and introduces the methodology how the model is derived from option pricing theory. The thesis examines the dynamic impact of capital structure on firm performance in nigeria. Capital structure decisions and the relative efficiency of chapter 11. Therefore, it is the duty of all finance managers to find the optimal capital structure that will result in the lowest wacc. The model extends the dynamic capital structure literature by endogenizing the. This paper also builds an analytical model for the optimal capital structure of building companies, which can serve as an evaluation tool when governments and. In contrast to prior dynamic capital structure models, for example, fischer et al. A dynamic tradeo theory for financially constrained firms patrick bolton hui cheny neng wangz june 12, 20 abstract we analyze a model of optimal capital structure and liquidity choice based on a dynamic tradeo theory for nancially constrained rms.
A dynamic tradeo theory for financially constrained firms. I then solve for the optimal capital structure and the optimal employment contract in section 3. Optimal leverage and maturity choice in a dynamic model. We find that even small recapitalization costs lead to wide swings in a firms debt ratio over time. A dynamic model of optimal capital structure by sergey tsyplakov. By reconciling empirical evidence with theory practical strategies for managing capital structure in transition are suggested. We study the impact of timevarying macroeconomic conditions on optimal dynamic capital structure for a crosssection of firms. June 2003 abstract we introduce a dynamic model of optimal capital structure.
Citations of a dynamic model of optimal capital structure. Hence, timeseries changes in observed debt ratios are influenced by changes in the target debt ratio as well as by economic changes and corporate actions that move firms either away from or towards. Dynamic optimal capital structure and technical change. Purpose the purpose of this paper is to use a dynamic model to investigate capital structure determinants for 178 firms listed on the johannesburg stock exchange for the period 19982008. A dynamic model of optimal capital structure abstract this paper presents a continuous time model of a. Demarzo and yuliy sannikov abstract we derive the optimal dynamic contract in a continuoustime principalagent setting, and implement it. We study optimal capital structure by first estimating firmspecific cost and benefit functions for debt. We estimate a dynamic model in which a taxable firm seeks financing for. Dynamic moral hazard, riskshifting, and optimal capital. The theory provides the optimal dynamic recapitalization policy as a function of firm.
It is demonstrated that a dynamic model is crucial to obtain reasonable leverage ratios and that a stochastic interest rate is important to study optimal debt maturity structure. A dynamic model of optimal capital structure econpapers. Further, we incorporate a call premium in the dynamic model with mean reversion and show that assuming debt being callable at par may lead to somewhat understated leverage and too high restructuring frequency. The model extends the existing literature by endogenizing the investment choice as well as firm value, which are both determined by an exogenous price process that describes the firms product market.
We quantify the importance of collateral versus taxes for firms capital structures. A dynamic model of optimal capital structure and debt. Journal of financial economics tsinghua university. The focus is on discrepancy between observed and optimal capital structures. Thus the higher the risk and volatility in the economy, the lower the proportion of debt in the capital structure should be. A dynamic model of optimal capital structure after. By assuming that this debt consists in a regular coupon bond. In the model we endogenize the investment choice as well as firm value, which are both determined by an exogenous price process that describes the.
We build a dynamic model in which an optimal capital structure, in the spirit of jensen 1986, is determined by the tradeo. What is interesting is the rate at which leverage converges. Abstract this paper provides a competitive equilibrium model of capital structure and industry dynamics. We put forward a theory of the optimal capital structure of the firm based on jensens 1986. Evidence from nigerian listed firms examination of optimal capital structure in financial markets with imperfections suggests that when. Dynamic model of optimal capital structure sage journals. Optimal capital structure and industry dynamics core. Optimal capital structure and industry dynamics jianjun miao. We put forward a theory of the optimal capital structure of the firm based on jensens 1986 hypothesis that a firms choice of capital structure is determined by a tradeoff between agency costs and monitoring costs. We introduce a dynamic model of optimal capital structure. The model extends the dynamic capital structure literature by endogenizing the investment choice as well as firm value, which are both determined by an exogenous price process that. Optimum capital structure f9 financial management acca. A dynamic theory of optimal capital structure and executive.
Pdf the aggregate dynamics of capital structure and. To model agency costs, we follow demarzo and sannikov 2006, demarzo and fishman 2007, and biais et al. A dynamic model of optimal capital structure by sheridan. An empirical model of optimal capital structure scholarlycommons. In the model, firms make financing, investment, entry, and exit. In the model we endogenize the investment choice as well as firm value, which are both determined by an exogenous price process that describes the firms product market. A dynamic theory of optimal capital structure and executive compensation. This paper presents a continuous time model of a firm that can dynamically adjust both its capital structure and its investment choices. Our theory is developed in an dynamic optimal contracting framework, and, as a. Our structuralequilibrium framework embeds a contingentclaim corporate financing model within a consumptionbased assetpricing model. The model extends the dynamic capital structure literature by endogenizing the investment choice as well as. Introduction most capital structure models assume that the decision of how much debt to issue is a static choice.
It is also demonstrated that a model of optimal capital structure with a constant interest rate cannot price risky bonds and. The dynamic model of partial adjustment of the capital. This paper provides a competitive equilibrium model of capital structure and industry dy namics. The capital structure decision aswath damodaran stern school of business. The capital structures in leland 1994 and leland and toft. In this section, we analyze the optimal capital structure of the firm with the option to reorganize or liquidate. Therefore, the search for the optimal capital structure becomes the search for the lowest wacc, because when the wacc is minimised, the value of the companyshareholder wealth is maximised. A dynamic model of optimal capital structure and debt maturity with stochastic interest rates abstract this paper develops a model in which an optimal capital structure and an optimal debt maturity are jointly determined in a stochastic interest rate environment. In the fhz model, the firms optimal dynamic capital structure policy depends upon the benefit of debt. Dynamic capital structure modelling under alternative. Fischer, heinkel and zechner fhz, 1989 suggest that the debt ratio range is a more relevant measure of a firms dynamic debt policy. We investigate the effect of macroeconomic conditions on asset valuation and optimal corporate policies, and. Creditors anticipate equityholders expost reorganization incentives and price them into the exante credit spreads.
In this article, we solve for the optimal dynamic capital strategy of a. Section 4 presents comparative statics on the model s predictions of unique optimal capital structures. Aswath damodaran 14 optimum capital structure and cost of capital n if the cash flows to the firm are held constant, and the cost of capital is minimized, the value of the firm. The dynamic model of partial adjustment of the capital structure reflects the fact that the optimal level of leverage varies between companies and over time. The model extends the dynamic capital structure literature by endogenizing the investment choice as well as firm value, which are both determined by an exogenous price process that describes the firms product market.
Dynamic moral hazard, riskshifting, and optimal capital structure alejandro riveray november 17, 2015 abstract i develop an analytically tractable model. Further assume that the firm incurs a transaction cost proportional to the value of the debt issued. Dynamic moral hazard, riskshifting, and optimal capital structure alejandro rivera y january 10, 2015 abstract i develop an analytically tractable model that integrates the riskshifting problem between bondholders and shareholders with the moral hazard problem between shareholders and the manager. This paper develops a model of dynamic capital structure choice in the presence of recapitalization costs. The problem of determining the optimal capital structure of the. In the model we endogenize the investment choice as well as firm. Dynamic investment, capital structure, and debt overhang. A dynamic model of optimal capital structure by sergey. Analytic solutions for the value of debt and equity are provided when the firm has the opportunity to issue new debt optimally at. A model of dynamic compensation and capital structure. Valuation formulas are derived in closed form and numerical solutions are used to. There, the agents compensation space is restricted to equity shares, and shareholders commit to this static compensation scheme. Considering these dynamic features of the tax code requires.
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