A Dynamic Model of Optimal Capital Structure

Sergey Tsyplakov and Sheridan Titman

No 549, 2004 Meeting Papers from Society for Economic Dynamics

Abstract: This paper presents a continuous time model of a firm that can dynamically adjust both its capital structure and its investment choices. The model extends the existing literature by endogenizing the investment choice as well as firm value, which are both determined by an exogenous price process that describes the firm's product market. Within the context of this model we explore interactions between financial distress costs and debtholder/equityholder agency problems and examine how the ability to dynamically adjust the capital structure choice affects debt choices. The model simultaneously generates quantitative implications on how firm characteristics such as the depreciation rate of the firm's assets, expected future growth opportunities, financial distress costs, taxes and transaction costs affect choice of debt ratios

Keywords: Capital Structure Choice; Investment Decisions; Transaction Costs; Agency Problems (search for similar items in EconPapers)
JEL-codes: G32 G34 G35 (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-cfn and nep-dge
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: A Dynamic Model of Optimal Capital Structure (2007)
Working Paper: A dynamic model of optimal capital structure (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed004:549

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