Optimal Capital Structure and Industry Dynamics

Jianjun Miao

No 440, CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics

Abstract: This paper provides a competitive equilibrium model of capital structure and industry dynamics. In the model, firms make financing, investment, entry, and exit decisions subject to idiosyncratic technology shocks. The capital structure choice reflects the tradeoff between the tax benefits of debt and the associated bankruptcy and agency costs. The interaction between financing and production decisions influences the stationary distribution of firms and their survival probabilities. The analysis demonstrates that the equilibrium output price has an important feedback effect. This effect has a number of testable implications. For example, high growth industries have relatively lower leverage and turnover rates.

Keywords: capital structure; agency costs; firm turnover; stationary equilibrium (search for similar items in EconPapers)
Pages: 45 pages
Date: 2011
New Economics Papers: this item is included in nep-bec, nep-cfn and nep-tid
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Citations: View citations in EconPapers (1)

Published in Journal of Finance 6 (2005), 2621-2659.

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Related works:
Journal Article: Optimal Capital Structure and Industry Dynamics (2005)
Working Paper: Optimal Capital Structure and Industry Dynamics (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:cuf:wpaper:440

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