Capital Structure: Optimal Leverage and Maturity Choice in a Dynamic Model

Revista de Economía Financiera, Vol. 18, pp. 26-47, 2009

33 Pages Posted: 8 Feb 2006 Last revised: 18 Jan 2012

Santiago Forte

ESADE Business School, Ramon Llull University

Date Written: September 1, 2009

Abstract

We introduce a model in which risk-free interest rate, firm risk, bankruptcy costs, issuance costs, tax benefits on debt, and earnings ratio, determine the optimal choice of leverage and maturity. The model assumes that debt pays a regular flow of interests, allows the firm to rebalance its optimal capital structure at maturity issuing new debt at par, links tax deductions to the presence of taxable income, and considers default to be an endogenous and time-dependent decision. Simulation results are also provided, with standard leverage ratios, debt maturities, and credit spreads being replicated for reasonable parameter values.

Keywords: capital structure, optimal leverage, optimal maturity, dynamic model

JEL Classification: G32

Suggested Citation

Forte, Santiago, Capital Structure: Optimal Leverage and Maturity Choice in a Dynamic Model (September 1, 2009). Revista de Economía Financiera, Vol. 18, pp. 26-47, 2009. Available at SSRN: https://ssrn.com/abstract=881538

Santiago Forte (Contact Author)

ESADE Business School, Ramon Llull University ( email )

Av. Torreblanca 59
Sant Cugat del Vallès, Barcelona 08172
Spain

HOME PAGE: http://www.santiagoforte.com

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