Design of a self-adaptive model for leverage

Maxime Segal and Sverrir Ólafsson

Finance Research Letters, 2023, vol. 54, issue C

Abstract: In this research letter, we introduce a version of a CoCo bond to construct a new model for dynamically adjusting a firm’s leverage. The resulting leverage dynamic allows keeping the issuer’s leverage ratio within some predetermined boundaries where the likelihood of default on outstanding liabilities remains small and, at the same time, ensures the firm’s financial efficiency through a reissuance feature, when the leverage reaches too low levels. Different control actions are studied in this scope, since none requires external intervention, they act as a ‘watchdog’, ensuing in a self-adaptive debt-to-assets ratio. The model exhibits interesting mean-reverting properties and is notably suitable for the analysis of a real firm’s behavior.

Keywords: Contingent convertible; Hybrid securities; Leverage; Probability of default; Capital structure of the firm (search for similar items in EconPapers)
JEL-codes: G12 G21 G28 G32 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:54:y:2023:i:c:s1544612323000958

DOI: 10.1016/j.frl.2023.103721

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