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Debt structure and debt overhang

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  • Gan, Liu
  • Xia, Xin
  • Zhang, Hai

Abstract

We study the impact of heterogeneous debt structures on corporate financing and investment decisions in a dynamic trade-off model. The issuance of bank debt along with market debt accelerates investment and mitigates the ex-post debt overhang relative to exclusive market debt structures. A growth firm optimally increases its reliance on bank debt and decreases its usage of market debt when it has fewer valuable growth opportunities, its asset volatility is higher, its bankruptcy cost is lower, or it faces a low tax rate environment. We identify the non-monotonic effects of the cyclicality of growth opportunities on firms’ optimal debt composition.

Suggested Citation

  • Gan, Liu & Xia, Xin & Zhang, Hai, 2022. "Debt structure and debt overhang," Journal of Corporate Finance, Elsevier, vol. 74(C).
    • Handle: RePEc:eee:corfin:v:74:y:2022:i:c:s0929119922000438
    DOI: 10.1016/j.jcorpfin.2022.102200
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    More about this item

    Keywords

    Debt structure; Corporate investment; Financing; Debt overhang;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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