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An EBIT‐Based Model of Dynamic Capital Structure
Abstract
An EBIT-Based Model of Dynamic Capital Structure* I. IntroductionMost capital structure models assume that the decision of how much debt to issue is a static choice.In practice, however, firms adjust outstanding debt levels in response to changes in firm value.In this article, we solve for the optimal dynamic capital strategy of a firm and investigate the implications for optimal leverage ratios and the magnitude of the tax benefits to debt.Below, we consider.only the option to increase future debt levels.While in theory management can both increase and decrease future debt levels, Gilson (1997) finds that transactions costs discourage debt reductions outside of Chapter 11.In addition, equity's ability to A model of dynamic capital structure is proposed.Even though the optimal strategy is implemented over an arbitrarily large number of restructuringperiods, a scaling feature inherent in the framework permits simple closedform expressions to be obtained for equity and debt prices.When a firm has the option to increase future debt levels, tax advantages to debt increase significantly, and both the optimal leverage ratio range and predicted credit spreads are more in line with what is observed in practice.
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Cites
The pricing of options and corporate liabilities
Black, F., & Scholes, M. (1973) · Journal of Political Economy · doi:10.1086/260062 · Cited by 29,074
Miller, M. H. (1977) · The Journal of Finance · doi:10.1111/j.1540-6261.1977.tb03267.x · Cited by 2,898
Cited by
A Review of Empirical Capital Structure Research and Directions for the Future
Graham, J. R., & Leary, M. T. (2011) · Annual Review of Financial Economics · doi:10.1146/annurev-financial-102710-144821 · Cited by 547
Managerial Traits and Capital Structure Decisions
Hackbarth, D. (2008) · Journal of Financial and Quantitative Analysis · doi:10.1017/s002210900001437x · Cited by 540
Trade-Off and Pecking Order Theories of Debt
Frank, M. Z., & Goyal, V. K. (2007) · SSRN Electronic Journal · doi:10.2139/ssrn.670543 · Cited by 455
Dynamic Models and Structural Estimation in Corporate Finance
Strebulaev, I. A. (2011) · Foundations and Trends® in Finance · doi:10.1561/0500000035 · Cited by 259
Corporate Governance and Long-Run Risk Premia
Ekponon, A. (2019) · SSRN Electronic Journal · doi:10.2139/ssrn.3440168
Metadata
- Authors
- Goldstein, R., Ju, N., & Leland, H.
- Venue
- The Journal of Business
- Publisher
- University of Chicago Press
- Published
- 2001-10
- Volume
- 74
- Issue
- 4
- Pages
- 483-512
- ISSN
- 0021-9398 (ISSN-L)
- 1537-5374
- OpenAlex
- W3123014546
- Cited by
- 955
- References
- 2
- FWCI
- 62.84
- Type
- journal article
- Language
- en
- Open access
- closed
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