Debt Dynamics with Fixed Issuance Costs

76 Pages Posted: 25 Sep 2019 Last revised: 15 Jul 2022

See all articles by Luca Benzoni

Luca Benzoni

Federal Reserve Bank of Chicago - Research Department

Lorenzo Garlappi

University of British Columbia (UBC) - Sauder School of Business

Robert S. Goldstein

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

Chao Ying

Chinese University of Hong Kong

Multiple version iconThere are 2 versions of this paper

Date Written: September 16, 2019

Abstract

We investigate equilibrium debt dynamics for a firm that cannot commit to a future debt policy and is subject to a fixed restructuring cost. We formally characterize equilibria when the firm is not required to repurchase outstanding debt prior to issuing additional debt. For realistic values of issuance costs and debt maturity, the no-commitment policy generates tax benefits that are similar to those obtained by a benchmark policy with commitment. For positive but arbitrarily small issuance costs, there are maturities for which shareholders extract essentially the entire claim to cash-flows.

Keywords: Capital structure; Debt dynamics; Commitment; Issuance costs; Debt maturity

JEL Classification: G12, G32, G33

Suggested Citation

Benzoni, Luca and Garlappi, Lorenzo and Goldstein, Robert S. and Ying, Chao, Debt Dynamics with Fixed Issuance Costs (September 16, 2019). Available at SSRN: https://ssrn.com/abstract=3454791 or http://dx.doi.org/10.2139/ssrn.3454791

Luca Benzoni

Federal Reserve Bank of Chicago - Research Department ( email )

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Lorenzo Garlappi

University of British Columbia (UBC) - Sauder School of Business ( email )

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Canada

Robert S. Goldstein (Contact Author)

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

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National Bureau of Economic Research (NBER)

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Chao Ying

Chinese University of Hong Kong ( email )

Cheng Yu Tung Building
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Shatin, NT
Hong Kong

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