Abstract
We introduce a model in which risk-free interest rates, firm risk, bankruptcy costs, issuance costs, tax benefits on debt, and earnings ratio determine the optimal choice of leverage and maturity. The model assumes that debt pays a regular flow of interest, allows the firm to rebalance its optimal capital structure at maturity issuing new debt at par, links tax deductions to the presence of taxable income, and considers default to be an endogenous and time-dependent decision. Simulation results are also provided, with standard leverage ratios, debt maturities and credit spreads being replicated for reasonable parameter values.
| Original language | English |
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| Pages | 60-81 |
| Specialist publication | Revista de Economía Financiera |
| Publication status | Published - 1 Sept 2009 |