Work

Debt Dynamics

Year: 2005

Type: article

Abstract: ABSTRACT We develop a dynamic trade‐off model with endogenous choice of leverage, distributions, and real investment in the presence of a graduated corporate income tax, individual taxes on interest and corporate distributions, financial distress costs, and equity flotation costs. We explain several empirical findings inconsistent with the static trade‐off theory. We show there is no target leverage ratio, firms can be savers or heavily levered, leverage is path dependent, leverage is decreasing in lagged liquidity, and leverage varies negatively with an external finance weighted average Q . Using estimates of structural parameters, we find that simulated model moments match data moments.

Source: The Journal of Finance

DOI: 10.1111/j.1540-6261.2005.00758.x

Authors: CHRISTOPHER A. HENNESSY, TONI M. WHITED

Institutions: University of Wisconsin–Madison, University of Houston, University of California, Berkeley

Language: English

Topic: Corporate Finance and Governance

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W4246259718

FWCI: 41.78

Cites: 89

Cited by: 747

Related to: 10