Optimal Capital Structure with Scale Effects under Spectrally Negative Levy Models
The 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.
|Date of creation:||Sep 2011|
|Date of revision:||Dec 2013|
|Publication status:||Published in Int. J. Theor. Appl. Finan., Volume 17, Issue 02, March 2014|
|Contact details of provider:|| Web page: http://arxiv.org/|
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- Leland, Hayne E & Toft, Klaus Bjerre, 1996.
" Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads,"
Journal of Finance,
American Finance Association, vol. 51(3), pages 987-1019, July.
- Hayne E. Leland and Klaus Bjerre Toft., 1995. "Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads," Research Program in Finance Working Papers RPF-259, University of California at Berkeley.
- Nan Chen & S. G. Kou, 2009. "Credit Spreads, Optimal Capital Structure, And Implied Volatility With Endogenous Default And Jump Risk," Mathematical Finance, Wiley Blackwell, vol. 19(3), pages 343-378.
- Hayne E. Leland., 1994.
"Corporate Debt Value, Bond Covenants, and Optimal Capital Structure,"
Research Program in Finance Working Papers
RPF-233, University of California at Berkeley.
- Leland, Hayne E, 1994. " Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 49(4), pages 1213-52, September.
- 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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