Capital Structure with Asset Flexibility

58 Pages Posted: 11 Dec 2018

See all articles by Peter H. Ritchken

Peter H. Ritchken

Case Western Reserve University - Department of Banking & Finance

Qi Wu

Case Western Reserve University, Weatherhead School of Management

Date Written: November 16, 2018

Abstract

The ability of equityholders/managers to partially control the earnings stream by temporarily shutting down to avoid negative earnings has an enormous effect on the choice of capital structure. Increasing switching costs reduces operating flexibility, and reduced operating flexibility implies less use of debt, but only up to a point beyond which the firm commits to significantly more debt.

Keywords: Dynamic Capital Structure, Asset Flexibility, Profitability, Growth Options, Switching Costs

JEL Classification: G32

Suggested Citation

Ritchken, Peter H. and Wu, Qi, Capital Structure with Asset Flexibility (November 16, 2018). Available at SSRN: https://ssrn.com/abstract=3286049 or http://dx.doi.org/10.2139/ssrn.3286049

Peter H. Ritchken (Contact Author)

Case Western Reserve University - Department of Banking & Finance ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States
216-368-3849 (Phone)
216-368-4776 (Fax)

Qi Wu

Case Western Reserve University, Weatherhead School of Management ( email )

10900 Euclid Ave.
Cleveland, OH 44106
United States

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