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Debt dynamics with fixed issuance costs

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  • Benzoni, Luca
  • Garlappi, Lorenzo
  • Goldstein, Robert S.
  • Ying, Chao

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.

Suggested Citation

  • Benzoni, Luca & Garlappi, Lorenzo & Goldstein, Robert S. & Ying, Chao, 2022. "Debt dynamics with fixed issuance costs," Journal of Financial Economics, Elsevier, vol. 146(2), pages 385-402.
    • Handle: RePEc:eee:jfinec:v:146:y:2022:i:2:p:385-402
    DOI: 10.1016/j.jfineco.2022.07.006
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    3. Andrea Gamba & Alessio Saretto, 2023. "Debt Maturity and Commitment on Firm Policies," Working Papers 2303, Federal Reserve Bank of Dallas.

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    More about this item

    Keywords

    Capital structure; Debt dynamics; Commitment; Issuance costs; Debt maturity;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • 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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