Admati, Demarzo, Hellwig, and Pfleiderer (ADHP, 2018) note that static models of optimal leverage have assumed firms have no prior debt. In this case, the leverage that maximizes firm value also maximizes value to the initial equity owners. However, using a simple two-period model with zero...

We examine the optimal mixture and priority structure of bank and market debt using a tradeoff model where banks have the unique ability to renegotiate outside formal bankruptcy. Flexible bank debt offers a superior tradeoff between tax shields and bankruptcy costs. Ease of renegotiation limits...

Random assignment is insufficient for measured treatment responses to recover causal effects (comparative statics) in dynamic economies. We characterize analytically bias probabilities and magnitudes. If the policy variable is binary there is attenuation bias. With more than two policy states,...

We incorporate structural modellers into the economy they model. Using the traditional moment-matching method, they ignore policy feedback and estimate parameters using a structural model that treats policy changes as zero probability (or exogenous) "counterfactuals." Estimation bias occurs...

Causal evidence from random assignment has been labeled "the most credible." We argue itis generally incomplete in finance/economics, omitting central parts of the true empirical causalchain. Random assignment, in eliminating self-selection, simultaneously precludes signaling viatreatment...

Absent theoretical guidance, empiricists have been forced to rely upon numerical comparative statics from constant tax rate models in formulating testable implications of tradeoff theory in the context of natural experiments. We fill the theoretical void by solving in closed-form a dynamic...

This paper examines the optimal mix and priority structure of bank and market debt using a tax shield-bankruptcy cost tradeoff model where the only unique feature of banks is their ability to renegotiate. Closed-form expressions are derived for the values of renegotiable bank debt,...