Costly Financing, Optimal Payout Policies and the Valuation of Corporate Debt

Viral Acharya, J. Huang, Marti G. Subrahmanyam and R. Sundaram
Authors registered in the RePEc Author Service: Jikun Huang and Jingzhi Huang

New York University, Leonard N. Stern School Finance Department Working Paper Seires from New York University, Leonard N. Stern School of Business-

Abstract: We present a cash-flow based model of corporate debt valuation that incorporates two novel features. First, we allow for the separation and optimal determination of the firm's debt-service and dividend policies; in particular, the firm is allowed to maintain cash reserves to meet future debt obligations. Second, our model admits the possibility that raising resources through issuance of new equity could be a costly procedure. In contrast, much of the previous literature has considered only dividend polices that are the "residual" consequences of debt-service policy, and has assumed new equity issuance costs are either zero or infinite.

Date: 2000-07-31
New Economics Papers: this item is included in nep-cfn and nep-fin
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Citations: View citations in EconPapers (8)

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