An EBIT-Based Model of Dynamic Capital Structure
Robert S. Goldstein
University of Minnesota - Twin Cities - Carlson School of Management; National Bureau of Economic Research (NBER)
Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)
Hayne E. Leland
University of California, Berkeley - Walter A. Haas School of Business
Journal of Business, Vol. 74, No. 4, October 2001
A model of dynamic capital structure is proposed. Even though the optimal strategy is implemented over an arbitrarily large number of restructuring periods, a scaling feature inherent in the framework permits simple closed-form 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.
Date posted: December 29, 2001
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