Debt dynamics with fixed issuance costs

Luca Benzoni; Lorenzo Garlappi; Robert S. Goldstein; Chao Ying

doi:10.1016/j.jfineco.2022.07.006

Journal of Financial Economics Vol. 146 No. 2 2022

Debt dynamics with fixed issuance costs

Luca Benzoni¹; Lorenzo Garlappi²; Robert S. Goldstein³; Chao Ying⁴

¹ Federal Reserve Bank of Chicago · ² University of British Columbia · ³ University of Minnesota · ⁴ Chinese University of Hong Kong

open access

Abstract

We investigate equilibrium debt dynamics for a firm that cannot commit to a future debt policy and is subject to a fixed restructuring cost. We formally characterize equilibria when the firm is not required to repurchase outstanding debt prior to issuing additional debt. For realistic values of issuance costs and debt maturity, the no-commitment policy generates tax benefits that are similar to those obtained by a benchmark policy with commitment. For positive but arbitrarily small issuance costs, there are maturities for which shareholders extract essentially the entire claim to cash-flows.

DOI: 10.1016/j.jfineco.2022.07.006
Volume: 146
Issue: 2
Pages: 385-402
Language: en
Sources: bibtex:phds-export.bib openalex crossref

Debt dynamics with fixed issuance costs

Abstract

Cite