We show that the structure and pricing of debt in LBOs mostly depend on a single characteristic of the target firm, pre-LBO profitability. We find a positive relationship between pre-LBO profitability and deal leverage, that is consistent with a dynamic trade-off theory of capital structure in...

We reconcile two seemingly contrasting empirical facts, active capital structure rebalancing and slow adjustments towards target leverage, through the lens of a standard dynamic capital structure model. In the model, firms adjust leverage towards a dynamic target, which is firm specific and...

We revisit the relation between equity returns and financial leverage through the lens of a trade-off model with costly capital structure rebalancing. The model provides a “lookalike” Modigliani-Miller equation that predicts that expected equity returns depend on whether a firm's leverage is...

We review the literature on debt structure, which is a central element in a firm's capital structure. We first survey both theoretical and empirical research pertaining to debt characteristics – maturity and priority – and debt types – bank loans, corporate bonds, credit lines, commercial...

We review the literature on debt structure, which is a central element in a firm's capital structure. We first survey both theoretical and empirical research pertaining to debt characteristics—maturity and priority—and debt types—bank loans, corporate bonds, credit lines, commercial paper,...

We revisit the relation between equity returns and financial leverage through the lens of a dynamic trade-off model with costly capital structure rebalancing. The model predicts that expected equity returns depend on whether a firm's leverage is above or below its target leverage. We provide...