Article ID Journal Published Year Pages File Type
985989 Review of Financial Economics 2010 14 Pages PDF
Abstract

This paper applies a nonlinear structural equation framework to analyze dynamic capital structure choice. I test the hypothesis that firms adjust leverage towards a time-varying target, and that this target is determined by solving an optimization problem: optimal leverage is achieved when the difference between the expected net present value of the tax shield and the expected net present value of the costs of insolvency is maximized. Results indicate that firm size is an important determinant of the validity of this simple trade-off model.

Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
Authors
,