A Dynamic Model of Optimal Capital Structure

Titman, Sheridan; Tsyplakov, Sergey

doi:10.2139/ssrn.332042

Cited by 137 publications

(166 citation statements)

References 69 publications

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“…They show that capital structure can have a significant impact on operating decisions. Tserlukevich (2008) and Titman and Tsyplakov (2010) build dynamic models in which firms can issue debt to exercise a sequence of growth options. Leland (1998) studies the joint determination of capital structure and asset risk, while Chen and Manso (2010) emphasize that incorporating macroeconomic risk can increase agency costs of debt substantially.…”

Section: Introductionmentioning

confidence: 99%

Capital Structure, Product Market Dynamics, and the Boundaries of the Firm

2014

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We study how interactions between financing and investment decisions can shape firm boundaries in dynamic product markets. In particular, we model a new product market opportunity as a growth option and ask whether it is best exploited by a large incumbent firm (Integration) or by a separate, specialized firm (Non-Integration). Starting from a standard theoretical framework, in which value-maximizing corporate investment and financing decisions are jointly determined, we show that Integration best protects assets in place value, while Non-Integration best protects the value of the growth option and maximizes financial flexibility. These forces drive different organizational equilibria depending on firm and product market characteristics. In particular, we show that increases in standard measures of cash flow risk predict exploitation of new opportunities by specialized firms, while increases in product market risk (i.e., the risk of preemption by competitors) predict exploitation by incumbents. We also show that alliances organized as licensing agreements or revenue sharing contracts sometimes better balance the different sources of value, and thus may dominate more traditional forms of organization. These key results arise from the dynamic interaction of the new opportunity's option-like features with realistic competitive forces. JEL Classification Numbers: G13, G31, G32, G33.

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Section: Introductionmentioning

confidence: 99%

Capital Structure, Product Market Dynamics, and the Boundaries of the Firm

2014

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“…Indeed, there exists a vast literature on dynamic capital structure choices (see, for example, Mauer and Triantis [1994], Hennessy and Whited [2005], Titman and Tsyplakov [2006] or Strebulaev [2006]) which mainly focuses on the dynamic adjustment process of leverage across time. The early paper of Mauer and Triantis [1994] analyzes the impact of production and financial flexibility on the interactions between the firm's investment and financing decisions.…”

Section: Introductionmentioning

confidence: 99%

“…However, in the majority of these papers, the target leverage ratio is fixed and thus, the position of the firm in its development process is not important. Only recent papers have tried to allow changes in the target debt ratios and analyze the determinants of these changes over time (see, for example, Titman and Tsyplakov [2006]). Though, even in these models, the main focus still lies on the adjustment processes rather than on the impact of the initial financing structure on the future financing and investment decisions of the firm.…”

Section: Introductionmentioning

confidence: 99%

Financing Decisions Along a Firm's Life-Cycle: Debt as a Commitment Device

Hirsch

Walz

2009

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractWe analyze the life-cycle patterns of a firm's financing decisions and their interaction with future growth and development decisions. The framework derives three different financing sequences (debt-debt, equity-debt, equity-equity financing) which we link to existing empirical research. Furthermore, by adopting a life-cycle approach we are able to go one step beyond existing empirical research and derive testable hypotheses with respect to differences in the financing decisions of firms due to project, firm, market and country characteristics as well as the impact of a possible lack of start-up financing possibilities on firm dynamics.

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“…One strand beginning with Black and Scholes (1973) and Merton (1974) is in the framework of dynamic contingent claims analysis. Brennan and Schwartz (1984), Mello and Parsons (1992), Mauer and Triantis (1994), and Titman and Tsyplakov (2002) analyze the interaction between investment and financing decisions using numerical methods. Dixit (1989) studies entry and exit decisions under all-equity financing.…”

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confidence: 99%

Optimal Capital Structure and Industry Dynamics

Miao

2003

SSRN Journal

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This paper provides a competitive equilibrium model of capital structure and industry dynamics. In the model, firms make financing, investment, entry, and exit decisions subject to idiosyncratic technology shocks. The capital structure choice ref lects the tradeoff between the tax benefits of debt and the associated bankruptcy and agency costs. The interaction between financing and production decisions inf luences the stationary distribution of firms and their survival probabilities. The analysis demonstrates that the equilibrium output price has an important feedback effect. This effect has a number of testable implications. For example, high growth industries have relatively lower leverage and turnover rates.THE INTERACTION BETWEEN CAPITAL STRUCTURE and product market decisions has recently received considerable attention in both economics and finance. Beginning with Brander and Lewis (1986, 1988) and Maksimovic (1988), a growing number of theoretical papers investigate this interaction. In addition, many empirical studies (Chevalier (1995a(Chevalier ( , 1995b, Phillips (1995), Kovenock and Phillips (1997), Maksimovic and Phillips (1998), Zingales (1998), Lang, Ofek, andStulz (1996), Mackay and Phillips (2004)) examine the relation between capital structure and firm entry, exit, investment and output decisions.1 These studies generally document the following:(1) Industry output is negatively associated with the average industry debt ratio. (2) Plant closings are positively associated with debt and negatively associated with plant-level productivity. (3) Firm entry is positively associated with debt of incumbents. (4) Firm investment is negatively associated with debt. (5) There is substantial inter-and intra-industry variation in leverage.

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A Dynamic Model of Optimal Capital Structure

Cited by 137 publications

References 69 publications

Capital Structure, Product Market Dynamics, and the Boundaries of the Firm

Capital Structure, Product Market Dynamics, and the Boundaries of the Firm

Financing Decisions Along a Firm's Life-Cycle: Debt as a Commitment Device

Optimal Capital Structure and Industry Dynamics

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