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Optimal Capital Structure With Scale Effects Under Spectrally Negative Lévy Models

Author

Listed:
  • BUDHI ARTA SURYA

    (School of Business and Management, Bandung Institute of Technology, Jalan Ganesha No. 10, Bandung 40132, Indonesia)

  • KAZUTOSHI YAMAZAKI

    (Department of Mathematics, Faculty of Engineering Science, Kansai University, 3-3-35 Yamate-cho, Suita-shi, Osaka 564-8680, Japan)

Abstract

The optimal capital structure model with endogenous bankruptcy was first studied by Leland (1994) and Leland & Toft (1996), and was later extended to the spectrally negative Lévy model by Hilberink Rogers (2002) and Kyprianou Surya (2007). This paper incorporates scale effects by allowing the values of bankruptcy costs and tax benefits to be dependent on the firm's asset value. By using the fluctuation identities for the spectrally negative Lévy process, we obtain a candidate bankruptcy level as well as a sufficient condition for optimality. The optimality holds in particular when, monotonically in the asset value, the value of tax benefits is increasing, the loss amount at bankruptcy is increasing, and its proportion relative to the asset value is decreasing. The solution admits a semi-explicit form in terms of the scale function. A series of numerical studies are given to analyze the impacts of scale effects on the bankruptcy strategy and the optimal capital structure.

Suggested Citation

  • Budhi Arta Surya & Kazutoshi Yamazaki, 2014. "Optimal Capital Structure With Scale Effects Under Spectrally Negative Lévy Models," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 17(02), pages 1-31.
    • Handle: RePEc:wsi:ijtafx:v:17:y:2014:i:02:n:s0219024914500137
    DOI: 10.1142/S0219024914500137
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    Citations

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    Cited by:

    1. Tim Leung & Kazutoshi Yamazaki & Hongzhong Zhang, 2015. "An Analytic Recursive Method For Optimal Multiple Stopping: Canadization And Phase-Type Fitting," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 18(05), pages 1-31.
    2. Kazutoshi Yamazaki, 2017. "Inventory Control for Spectrally Positive Lévy Demand Processes," Mathematics of Operations Research, INFORMS, vol. 42(1), pages 212-237, January.
    3. Kazutoshi Yamazaki, 2016. "Optimality of two-parameter strategies in stochastic control," Papers 1605.04995, arXiv.org.
    4. Zbigniew Palmowski & José Luis Pérez & Budhi Arta Surya & Kazutoshi Yamazaki, 2020. "The Leland–Toft optimal capital structure model under Poisson observations," Finance and Stochastics, Springer, vol. 24(4), pages 1035-1082, October.
    5. Zbigniew Palmowski & Jos'e Luis P'erez & Budhi Arta Surya & Kazutoshi Yamazaki, 2019. "The Leland-Toft optimal capital structure model under Poisson observations," Papers 1904.03356, arXiv.org, revised Mar 2020.

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