Horses and Rabbits? Optimal Dynamic Capital Structure from Shareholder and Manager Perspectives / Nengjiu Ju, Robert Parrino, Allen M. Poteshman, Michael S. Weisbach.

Format:

Book

Author/Creator:

Ju, Nengjiu.

Contributor:

National Bureau of Economic Research.

Parrino, Robert.

Poteshman, Allen M.

Weisbach, Michael S.

Series:

Working Paper Series (National Bureau of Economic Research) no. w9327.

NBER working paper series no. w9327

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2002.

Summary:

This paper examines optimal capital structure choice using a dynamic capital structure model that is calibrated to reflect actual firm characteristics. The model uses contingent-claim methods to value interest tax shields, allows for reorganization in bankruptcy, and maintains a long-run target debt/equity ratio by refinancing maturing debt. Using this model we calculate optimal capital structures in a realistic representation of the traditional tradeoff' model. In contrast to previous research, the resulting optimal capital structures do not imply that firms tend to use too little leverage in practice. We also estimate the costs borne by a firm whose capital structure deviates from its optimal, target' debt/equity ratio. The costs of moderate deviations are relatively small, suggesting that a policy of adjusting leverage only when it deviates substantially from a target debt/equity ratio is likely to be reasonable for most firms.

Notes:

Print version record

November 2002.