Institutional Affiliation: University of Texas
|Horses and Rabbits? Optimal Dynamic Capital Structure from Shareholder and Manager Perspectives|
with Nengjiu Ju, , : w9327
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 ...
Published: Ju, Nengjiu, Robert Parrino, and Allen Poteshman and Michael Steen Weisbach. “Horses and Rabbits? Optimal Dynamic Capital Structure from Shareholders’ and Managers’ Perspectives." Journal of Financial and Quantitative Analysis 40 (June 2005): 259-281.
|Measuring Investment Distortions when Risk-Averse Managers Decide Whether to Undertake Risky Projects|
with , : w8763
This paper examines distortions in corporate investment decisions when a new project changes firm risk. It presents a dynamic model in which a self-interested, risk-averse manager makes investment decisions at a levered firm. The model, calibrated using data from public firms, is used to estimate the magnitude of distortions in investment decisions. Despite potential wealth transfers from debtholders, managers compensated with equity prefer safe projects to risky ones. Important factors in this decision are the expected changes in the values of future tax shields and bankruptcy costs when firm risk changes. We also evaluate the extent to which this effect varies with firm leverage, managerial risk aversion, managerial non-firm wealth, project size, debt duration, and the structure of ...
Published: Robert Parrino & Allen M. Poteshman & Michael S. Weisbach, 2005. "Measuring Investment Distortions when Risk-Averse Managers Decide Whether to Undertake Risky Projects," Financial Management, Financial Management Association, vol. 34(1), Spring. citation courtesy of