Posted: 29 Dec 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.
Suggested Citation: 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