Working Paper: NBER ID: w9327
Authors: Nengjiu Ju; Robert Parrino; Allen M. Poteshman; Michael S. Weisbach
Abstract: This paper examines optimal capital structure choice using a dynamic capital structure model that is calibrated to reflect actual firm characteristics. The model uses contingent-claim methods to value interest tax shields, allows for reorganization in bankruptcy, and maintains a long-run target debt/equity ratio by refinancing maturing debt. Using this model we calculate optimal capital structures in a realistic representation of the traditional tradeoff' model. In contrast to previous research, the resulting optimal capital structures do not imply that firms tend to use too little leverage in practice. We also estimate the costs borne by a firm whose capital structure deviates from its optimal, target' debt/equity ratio. The costs of moderate deviations are relatively small, suggesting that a policy of adjusting leverage only when it deviates substantially from a target debt/equity ratio is likely to be reasonable for most firms.
Keywords: No keywords provided
JEL Codes: G32; G33; H250
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital structure choices (G32) | firm value (G32) |
| deviations from optimal capital structure (G32) | costs (J30) |
| debt to total capital ratio of 14.42% (G32) | maximizes share value (G34) |
| debt to total capital ratio between 10.3% and 19.4% (G32) | increase in firm value (G32) |
| deviations exceeding ten percentage points (C46) | need to adjust capital structure (G32) |
| asset risk, bankruptcy costs, and maturity of debt (G33) | capital structure (G32) |