Optimal Capital Structure with Scale Effects under Spectrally Negative Levy Models
AbstractThe optimal capital structure model with endogenous bankruptcy was first studied by Leland (1994) and Leland and Toft (1996), and was later extended to the spectrally negative Levy model by Hilberink and Rogers (2002) and Kyprianou and Surya (2007). This paper incorporates the 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 Levy 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 default strategy and the optimal capital structure.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1109.0897.
Date of creation: Sep 2011
Date of revision: Dec 2013
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-09-16 (All new papers)
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- Leland, Hayne E & Toft, Klaus Bjerre, 1996.
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- Bianca Hilberink & L.C.G. Rogers, 2002. "Optimal capital structure and endogenous default," Finance and Stochastics, Springer, vol. 6(2), pages 237-263.
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