An EBIT-Based Model of Dynamic Capital Structure

Posted: 29 Dec 2001  

Robert S. Goldstein

University of Minnesota - Twin Cities - Carlson School of Management; National Bureau of Economic Research (NBER)

Nengjiu Ju

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Hayne E. Leland

University of California, Berkeley - Walter A. Haas School of Business

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Abstract

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.

Suggested Citation

Goldstein, Robert S. and Ju, Nengjiu and Leland, Hayne E., An EBIT-Based Model of Dynamic Capital Structure. Journal of Business, Vol. 74, No. 4, October 2001. Available at SSRN: https://ssrn.com/abstract=279468

Robert S. Goldstein (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
612-624-8581 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Nengjiu Ju

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Hayne E. Leland

University of California, Berkeley - Walter A. Haas School of Business ( email )

Haas School of Business
545 Student Services Building
Berkeley, CA 94720
United States
(510) 642-8694 (Phone)
(510) 643-1420 (Fax)

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