Optimal Leverage, Profitability and the Decision to Go Public

58 Pages Posted: 21 Nov 2016 Last revised: 7 Mar 2019

See all articles by Giulio Trigilia

Giulio Trigilia

University of Rochester - Simon Business School

Date Written: March 6, 2019

Abstract

I consider the role of firm transparency in shaping its capital structure. In a costly-state-verification model, the optimal capital structure can be implemented by a mixture of debt and outside equity. Consistent with empirical evidence, leverage decreases with both past and expected profitability, unlike in static trade-off theories. Highly profitable firms optimally choose zero leverage and finance themselves with equity. If firms can increase their transparency at a cost – say by going public – they tend to do so when interest rates are lower, when they face larger financing needs, when bankruptcy costs are higher and when analysts generate better information.

Keywords: optimal leverage and profitability, costly-state-verification, Ini- tial Public Offerings (IPOs), asymmetric information, trade-off theories, capital structure, transparency, security design

JEL Classification: D82, G20, G30

Suggested Citation

Trigilia, Giulio, Optimal Leverage, Profitability and the Decision to Go Public (March 6, 2019). Simon Business School Working Paper No. FR 16-12, Available at SSRN: https://ssrn.com/abstract=2872388 or http://dx.doi.org/10.2139/ssrn.2872388

Giulio Trigilia (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

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