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.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
9327.
Length: Date of creation: Nov 2002 Date of revision: Handle: RePEc:nbr:nberwo:9327
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Find related papers by JEL classification: G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Myers, Stewart C., 1984.
"Capital structure puzzle,"
Working papers
1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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Kane, Alex & Marcus, Alan J & McDonald, Robert L, 1984.
" How Big Is the Tax Advantage to Debt?,"
Journal of Finance,
American Finance Association, vol. 39(3), pages 841-53, July.
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