The Leland–Toft optimal capital structure model under Poisson observations

Zbigniew Palmowski (), José Luis Pérez (), Budhi Arta Surya () and Kazutoshi Yamazaki ()
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Zbigniew Palmowski: Wrocław University of Science and Technology
José Luis Pérez: Centro de Investigación en Matemáticas
Budhi Arta Surya: Victoria University of Wellington
Kazutoshi Yamazaki: Kansai University

Finance and Stochastics, 2020, vol. 24, issue 4, No 7, 1035-1082

Abstract: Abstract This paper revisits the optimal capital structure model with endogenous bankruptcy, first studied by Leland (J. Finance 49:1213–1252, 1994) and Leland and Toft (J. Finance 51:987–1019, 1996). Unlike in the standard case where shareholders continuously observe the asset value and bankruptcy is executed instantaneously without delay, the information of the asset value is assumed to be updated periodically at the jump times of an independent Poisson process. Under a spectrally negative Lévy model, we obtain the optimal bankruptcy strategy and the corresponding capital structure. A series of numerical studies provide an analysis of the sensitivity, with respect to the observation frequency, of the optimal strategies, optimal leverage and credit spreads.

Keywords: Credit risk; Endogenous bankruptcy; Optimal capital structure; Spectrally negative Lévy processes; Term structure of credit spreads; 60G40; 60G51; 91G40 (search for similar items in EconPapers)
JEL-codes: C61 G32 G33 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s00780-020-00431-6

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