Debt Maturity, Callability, and Dynamic Capital Structure

34 Pages Posted: 20 May 2021

See all articles by Christian Riis Flor

Christian Riis Flor

University of Southern Denmark

Jacob Lester

University of Copenhagen

Date Written: July 16, 2004


In a dynamic framework, this paper studies a firm’s optimal capital structure choice in terms of the maturity and call premium of the debt. The firm’s capital structure is optimized accordingto a trade-off between a tax advantage of debt, bankruptcy costs and debt issuance costs. The central result of the paper is that the firm issues perpetual debt with a small positive call premium. This implies that debt restructuringis non-deterministic and that the call premium is the key parameter that controls the equity holders’ ex post restructuringincen tives. However, in the special case of non-callable debt we generally find that finite maturity is optimal.

Keywords: Maturity, Callability, Call Premium, Debt Choice, True Finite Maturity

JEL Classification: G13, G32, G33

Suggested Citation

Flor, Christian Riis and Lester, Jacob, Debt Maturity, Callability, and Dynamic Capital Structure (July 16, 2004). Available at SSRN: or

Christian Riis Flor (Contact Author)

University of Southern Denmark ( email )

Campusvej 55
Odense DK-5230
+45 6550 3384 (Phone)
+45 6593 0726 (Fax)


Jacob Lester

University of Copenhagen ( email )

Nørregade 10
Copenhagen, København DK-1165

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