By assuming that this debt consists in a regular coupon bond. Request pdf dynamic model of optimal capital structure. Optimal security design and dynamic capital structure in a continuoustime agency model peter m. We study optimal capital structure by first estimating firmspecific cost and benefit functions for debt. The model extends the dynamic capital structure literature by endogenizing the. This paper develops a model of dynamic capital structure choice in the presence of recapitalization costs. A dynamic model of optimal capital structure by sergey. A dynamic model of optimal capital structure by sergey tsyplakov. The capital structures in leland 1994 and leland and toft. Pdf the aggregate dynamics of capital structure and. In this section, we analyze the optimal capital structure of the firm with the option to reorganize or liquidate. We build a dynamic model in which an optimal capital structure, in the spirit of jensen 1986, is determined by the tradeo.
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. A dynamic model of optimal capital structure after. Fischer, heinkel and zechner fhz, 1989 suggest that the debt ratio range is a more relevant measure of a firms dynamic debt policy. Dynamic capital structure modelling under alternative. We quantify the importance of collateral versus taxes for firms capital structures. 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. Dynamic investment, capital structure, and debt overhang. 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. What is interesting is the rate at which leverage converges. Optimal security design and dynamic capital structure in a.
Optimal capital structure and industry dynamics core. Evidence from nigerian listed firms examination of optimal capital structure in financial markets with imperfections suggests that when. Capital structure decisions and the relative efficiency of chapter 11. Optimal capital structure and industry dynamics jianjun miao. We find that even small recapitalization costs lead to wide swings in a firms debt ratio over time. 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.
In the model we endogenize the investment choice as well as firm. Contingent debt and performance pricing in an optimal. Sergey and titman, sheridan, a dynamic model of optimal capital structure. The problem of determining the optimal capital structure of the.
Further assume that the firm incurs a transaction cost proportional to the value of the debt issued. 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. In this article, we solve for the optimal dynamic capital strategy of a. Section 3 describes our optimal capital structure model and introduces the methodology how the model is derived from option pricing theory.
A dynamic theory of optimal capital structure and executive compensation. Thus the higher the risk and volatility in the economy, the lower the proportion of debt in the capital structure should be. Journal of financial economics tsinghua university. We study the impact of timevarying macroeconomic conditions on optimal dynamic capital structure for a crosssection of firms. 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. A dynamic theory of optimal capital structure and executive. 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.
This paper presents a continuous time model of a firm that can dynamically adjust both its capital structure and its investment choices. 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. The capital structure decision aswath damodaran stern school of business. No 549, 2004 meeting papers from society for economic dynamics. Based on a dynamic model of optimal capital structure with endogenous bankruptcy trigger and. In the fhz model, the firms optimal dynamic capital structure policy depends upon the benefit of debt. Optimum capital structure f9 financial management acca. As is standard in capital structure models, the equityholders internalize the inefficiency of their expost optimal bankruptcy procedure when they issue debt.
A dynamic model of optimal capital structure researchgate. Our theory is developed in an dynamic optimal contracting framework, and, as a. The model extends the dynamic capital structure literature by endogenizing the investment choice as well as. Our structuralequilibrium framework embeds a contingentclaim corporate financing model within a consumptionbased assetpricing model. 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. In the model, firms make financing, investment, entry, and exit. Introduction most capital structure models assume that the decision of how much debt to issue is a static choice. A dynamic model of optimal capital structure by sheridan. 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 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. The theory provides the optimal dynamic recapitalization policy as a function of firm. 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 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. Demarzo and yuliy sannikov abstract we derive the optimal dynamic contract in a continuoustime principalagent setting, and implement it. Dynamic optimal capital structure and technical change. We introduce a dynamic model of optimal capital structure. 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. A dynamic model of optimal capital structure and debt. Creditors anticipate equityholders expost reorganization incentives and price them into the exante credit spreads. Dynamic moral hazard, riskshifting, and optimal capital. To model agency costs, we follow demarzo and sannikov 2006, demarzo and fishman 2007, and biais et al. The focus is on discrepancy between observed and optimal capital structures. The dynamic model of partial adjustment of the capital. Citations of a dynamic model of optimal capital structure.
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. Dynamic moral hazard, riskshifting, and optimal capital structure alejandro riveray november 17, 2015 abstract i develop an analytically tractable model. 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. 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. A dynamic tradeo theory for financially constrained firms. I then solve for the optimal capital structure and the optimal employment contract in section 3. We investigate the effect of macroeconomic conditions on asset valuation and optimal corporate policies, and. In the model, firms make financing, investment, entry, and exit decisions subject to idiosyncratic technology shocks. Valuation formulas are derived in closed form and numerical solutions are used to. It is also demonstrated that a model of optimal capital structure with a constant interest rate cannot price risky bonds and. 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. We put forward a theory of the optimal capital structure of the firm based on jensens 1986. Compared with leland 1994, my model features a debtoverhang. Considering these dynamic features of the tax code requires.
Section 4 presents comparative statics on the model s predictions of unique optimal capital structures. This paper provides a competitive equilibrium model of capital structure and industry dy namics. An empirical model of optimal capital structure scholarlycommons. We estimate a dynamic model in which a taxable firm seeks financing for. This paper provides evidence for another, more fundamental, dark side of irr. 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. A model of dynamic compensation and capital structure. A dynamic model of optimal capital structure abstract this paper presents a continuous time model of a. An optimal capital structure is the best debttoequity ratio for a firm that maximizes its value. 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. The thesis examines the dynamic impact of capital structure on firm performance in nigeria. This is unlike previous studies in the capital structure literature that have used static analysis. Optimal leverage and maturity choice in a dynamic model.
In contrast to prior dynamic capital structure models, for example, fischer et al. We assume that early on in the production process, outside investors face an information friction with respect to withdrawing. Abstract this paper provides a competitive equilibrium model of capital structure and industry dynamics. 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. Capital structure leverage american economic association. June 2003 abstract we introduce a dynamic model of optimal capital structure. There, the agents compensation space is restricted to equity shares, and shareholders commit to this static compensation scheme. By reconciling empirical evidence with theory practical strategies for managing capital structure in transition are suggested. Dynamic model of optimal capital structure sage journals. 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. Analytic solutions for the value of debt and equity are provided when the firm has the opportunity to issue new debt optimally at.
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