While stock options are commonly used in managerial compensation to provide desirable incentives, they can create adverse incentives to distort the choice of investment risk. Relative to the risk level that maximizes firm value, call options in a compensation contract can induce too much or too...

A model of dynamic capital structure is proposed. Even though the optimal strategy is implemented over an arbitrarily large number of restructuring-periods, a scaling feature inherent in the framework permits simple closed-form expressions to be obtained for equity and debt prices. When a firm...

A model of dynamic capital structure is proposed. Even though the optimal strategy is implemented over an arbitrarily large number of restructuring periods, a scaling feature inherent in the framework permits simple closed-form expressions to be obtained for equity and debt prices. When a firm...

An acceptable model of capital structure theory must be able to explain both the wide range of debt ratios observed, and the apparently large tax advantage to debt, as evidenced by the large premiums paid during leveraged buyouts. Generalizing the framework of Leland (1994b), this paper...

While stock options are commonly used in managerial compensation to provide desirable incentives, their adverse effects have notbeen widely appreciated. We show that a call-type contractcreates incentives to distort the choice of investment risk.Relative to the risk level that maximizes firm...

Much of the literature on optimal capital structure has taken the unlevered firm value to be the underlying state variable, even though the unlevered firm ceases to exist after a capital structure change occurs. This approach has been a source of confusion, leading to conflicting views on the...