Dynamic Models and Structural Estimation in Corporate Finance
Final pre-publication version, published in Foundations and Trends in Finance 6 (2012), 1-163.
159 Pages Posted: 25 Jun 2012 Last revised: 19 Nov 2017
Date Written: December 1, 2012
We review the last two decades of research in dynamic corporate finance, focusing on capital structure and the financing of investment. We first cover continuous time contingent claims models, starting with real options models, and working through static and dynamic capital structure models. We then move on to corporate financing models based on discrete-time dynamic investment problems. We cover the basic model with no financing, as well as more elaborate models that include features such as costly external finance, cash holding, and both safe and risky debt. For all the models, we offer a minimalist, simplified presentation with a great deal of intuition. Throughout, we show how these models can answer questions concerning the effects of financial constraints on investment, the level of corporate leverage, the speed of adjustment of leverage to its target, and market timing, among others. Finally, we review and explain structural estimation of corporate finance models.
Keywords: Dynamic Corporate Finance, Structural Estimation
JEL Classification: G3
Suggested Citation: Suggested Citation