Optimum Corporate Leverage with Risky Debt: A Demand Approach

The Journal of Financial Research, Vol. 12, No. 2, pp. 129-142, Summer 1989

14 Pages Posted: 19 Feb 2008 Last revised: 20 Apr 2014

See all articles by Jongmoo Jay Choi

Jongmoo Jay Choi

Temple University; National Bureau of Economic Research (NBER); Temple University - International Business

Frank J. Fabozzi

EDHEC Business School

Uzi Yaari

Rutgers University; School of Business-Camden

Abstract

Traditional static models of corporations' interior optimum leverage rely on institutional mechanisms such as taxes, bankruptcy costs, and agency costs. Theories of leverage indifference in the presence of risky debt depend on various features of perfect and complete markets and on the assumption that all investors hold a uniform portfolio. In the model developed here, corporate interior optimum leverage is obtained as a result of a fundamental risk-return trade-off for investors who hold non-uniform portfolios of risky equity and debt claims in the absence of market mechanisms that would force leverage indifference. The dynamic optimization solution accommodates bankruptcy costs and specialized institutional factors but does not rely on their presence.

Keywords: optimal capital structure, static theory of capital structure

JEL Classification: G32

Suggested Citation

Choi, Jongmoo Jay and Fabozzi, Frank J. and Yaari, Uzi, Optimum Corporate Leverage with Risky Debt: A Demand Approach. The Journal of Financial Research, Vol. 12, No. 2, pp. 129-142, Summer 1989. Available at SSRN: https://ssrn.com/abstract=1094758

Jongmoo Jay Choi

Temple University ( email )

Fox School of Business
Temple University
Philadelphia, PA 19122
United States
215-204-5084 (Phone)
215-204-1697 (Fax)

HOME PAGE: http://astro.temple.edu/~jjchoi

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Temple University - International Business ( email )

Philadelphia, PA 19122
United States

Frank J. Fabozzi

EDHEC Business School ( email )

France
215 598-8924 (Phone)

Uzi Yaari (Contact Author)

Rutgers University ( email )

School of Business
Camden, NJ 08102
United States
610-664-2086 (Phone)

HOME PAGE: http://camden-sbc.rutgers.edu/FacultyStaff/Directory/yaari.htm

School of Business-Camden ( email )

Rutgers University
227 Penn Street
Camden, NJ 08102
United States
610-664-2086 (Phone)
610-664-2198 (Fax)

HOME PAGE: http://camden-sbc.rutgers.edu/FacultyStaff/Directory/yaari.htm

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