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Financing Innovations and Capital Structure Choices

16 Pages Posted: 7 Nov 2008  

Aswath Damodaran

New York University - Stern School of Business

Date Written: 1999

Abstract

The last two decades have seen a stream of innovation in financial markets, especially in the corporate bond arena. Some of these innovations were designed to give firms moreflexibility in designing cash flows on borrowings, allowing them to match up cash flows on financing more closely to cash flows on assets, thus increasing their debt capacity. These changes have been for the most part good news for corporate treasurers, but the relentless torrent of innovation has also resulted in some firms issuing these new and more complex securities for the wrong reasons. Some have done so to keep up with other firms in their peer group, and other to take advantage of loopholes in the way ratingsagencies and regulatory agencies define debt and equity. In this context, it is worth noting that as corporate bonds have become more complex, investment bankers oncemore become indispensable to the process, proving both pricing and selling support. It is important that firms recognize when complexity serves their interests, and when it can end up hurting them.

Suggested Citation

Damodaran, Aswath, Financing Innovations and Capital Structure Choices (1999). NYU Working Paper No. FIN-99-020. Available at SSRN: https://ssrn.com/abstract=1297066

Aswath Damodaran (Contact Author)

New York University - Stern School of Business ( email )

Stern School of Business
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New York, NY 10012-1126
United States
212-998-0340 (Phone)
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HOME PAGE: http://www.damodaran.com

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