Optimal Debt Dynamics, Issuance Costs, and Commitment

82 Pages Posted: 25 Sep 2019 Last revised: 9 Jun 2020

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)

Julien Hugonnier

Swiss Federal Institute of Technology Lausanne - Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Chao Ying

University of Minnesota - Twin Cities, Carlson School of Management

Date Written: September 16, 2019

Abstract

We investigate optimal capital structure and debt maturity policies in the presence of fixed issuance costs. We identify the global-optimal policy that generates the highest values of equity across all states of nature consistent with limited liability. The optimal policy without commitment provides almost as much tax benefits to debt as does the global-optimal policy and, in the limit of vanishing issuance costs, allows firms to extract 100% of EBIT. This limiting case does not converge to the equilibrium of DeMarzo and He (2019), who report no tax benefits to debt when issuance costs are set to zero at the outset.

Keywords: Capital Structure, Bankruptcy, Issuance Costs, Commitment, Coase Conjecture, Credit Spreads

JEL Classification: G12, G32, G33

Suggested Citation

Benzoni, Luca and Garlappi, Lorenzo and Goldstein, Robert S. and Hugonnier, Julien and Ying, Chao, Optimal Debt Dynamics, Issuance Costs, and Commitment (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 )

230 South LaSalle Street
Chicago, IL 60604
United States
312-322-8499 (Phone)

HOME PAGE: http://lbenzoni.frbchi.googlepages.com/

Lorenzo Garlappi

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

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

Robert S. Goldstein (Contact Author)

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

19th Avenue South
Minneapolis, MN 55455
United States
612-624-8581 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Julien Hugonnier

Swiss Federal Institute of Technology Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL Dorigny
Extranef
Lausanne, CH-1015
Switzerland

HOME PAGE: http://sfi.epfl.ch/hugonnier

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Chao Ying

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

Minneapolis, MN
United States

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