The Leland-Toft Optimal Capital Structure Model Under Poisson Observations

34 Pages Posted: 16 May 2019

See all articles by Zbigniew Palmowski

Zbigniew Palmowski

affiliation not provided to SSRN

José-Luis Pérez

Centro de Investigacion en Matematicas (CIMAT) - Department of Probability and Statistics

Budhi Surya

Victoria University of Wellington

Kazutoshi Yamazaki

Kansai University - Department of Mathematics

Date Written: April 16, 2019

Abstract

We revisit the optimal capital structure model with endogenous bankruptcy first studied by Leland (1994) and Leland and Toft (1996). Differently from the standard case, where shareholders observe continuously the asset value and bankruptcy is executed instantaneously without delay, we assume that the information of the asset value is updated only at intervals, modeled by the jump times of an independent Poisson process. Under the spectrally negative Levy model, we obtain the optimal bankruptcy strategy and the corresponding capital structure. A series of numerical studies are given to analyze the sensitivity of observation frequency on the optimal solutions, the optimal leverage and the credit spreads.

Keywords: credit risk, endogenous bankruptcy, optimal capital structure, spectrally negative Levy processes, term structure of credit spreads

JEL Classification: C61, G32, G33

Suggested Citation

Palmowski, Zbigniew and Pérez, José-Luis and Surya, Budhi and Yamazaki, Kazutoshi, The Leland-Toft Optimal Capital Structure Model Under Poisson Observations (April 16, 2019). Available at SSRN: https://ssrn.com/abstract=3372950 or http://dx.doi.org/10.2139/ssrn.3372950

Zbigniew Palmowski

affiliation not provided to SSRN

José-Luis Pérez

Centro de Investigacion en Matematicas (CIMAT) - Department of Probability and Statistics ( email )

Guanajuato
Mexico

Budhi Surya

Victoria University of Wellington ( email )

P.O. Box 600
Wellington, 6140
New Zealand
+64 4 463 5669 (Phone)

HOME PAGE: http://homepages.ecs.vuw.ac.nz/Users/BudhiSurya/WebHome

Kazutoshi Yamazaki (Contact Author)

Kansai University - Department of Mathematics ( email )

3-3-35 Yamate-cho, Suita-shi
Osaka, 564-8680
Japan

HOME PAGE: http://https://sites.google.com/site/kyamazak/

Register to save articles to
your library

Register

Paper statistics

Downloads
15
Abstract Views
127
PlumX Metrics