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Investment-based optimal capital structure

Author

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  • Jinglu Jiang
  • Xin Xia
  • Jinqiang Yang

Abstract

This paper extends the classical capital structure model by introducing the output of firm with ‘AK’ production technology dynamically depends on the endogenous investment decision and capital accumulation. Based on our calibration, it shows that the flexibility of dynamic investment and capital accumulation induces the firm to take the lower leverage at financing time and makes the leverage estimate closer to empirically observed leverage ratios, which provides an effective explanation for the ‘under-leverage puzzle’. In addition, this model predicts that the market leverage behaves in a U-shaped manner with capital liquidity, which provides a novel empirical test.

Suggested Citation

  • Jinglu Jiang & Xin Xia & Jinqiang Yang, 2019. "Investment-based optimal capital structure," Applied Economics, Taylor & Francis Journals, vol. 51(9), pages 972-981, February.
    • Handle: RePEc:taf:applec:v:51:y:2019:i:9:p:972-981
    DOI: 10.1080/00036846.2018.1524130
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    Cited by:

    1. Hossain, Mohammed Sawkat, 2021. "A revisit of capital structure puzzle: Global evidence and analysis," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 657-678.
    2. Wu, Ting & He, Linfeng & Zhang, Fan, 2021. "Endogenous discounting, investment and Tobin’s q," The North American Journal of Economics and Finance, Elsevier, vol. 55(C).
    3. Luigi Dolores & Maria Macchiaroli & Gianluigi De Mare, 2020. "A Dynamic Model for the Financial Sustainability of the Restoration Sponsorship," Sustainability, MDPI, vol. 12(4), pages 1-27, February.

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