A Testable Ebit-Based Credit Risk Model
42 Pages Posted: 28 May 2004
Date Written: January 13, 2004
We extend the EBIT-based dynamic capital structure model proposed by Goldstein, Ju and Leland (2001) to finite-maturity debt and multiple bond issues. The complete tax structure of Goldstein, Ju and Leland (2001) is maintained. In our setting, the usually available market data can be used for empirical testing. Accounting data is not necessary to test the model. Using a numerical implementation of our model, we also analyze optimal bankruptcy policies and the impact of different tax regimes on security values.
Keywords: firm and security valuation, business and investor taxation, optimal bankruptcy, credit risk, capital structure
JEL Classification: G12, G13, G32, G33
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