Horses and Rabbits? Optimal Dynamic Capital Structure from Shareholder and Manager Perspectives

Nengjiu Ju, Robert Parrino, Allen M. Poteshman and Michael Weisbach

No 9327, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G32 G33 (search for similar items in EconPapers)
Date: 2002-11
New Economics Papers: this item is included in nep-acc
Note: CF
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Citations: View citations in EconPapers (14)

Published as Ju, Nengjiu, Robert Parrino, and Allen Poteshman and Michael Steen Weisbach. “Horses and Rabbits? Optimal Dynamic Capital Structure from Shareholders’ and Managers’ Perspectives." Journal of Financial and Quantitative Analysis 40 (June 2005): 259-281.

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