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
Date Written: September 1, 2009
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: Suggested Citation