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...

We examine the optimal trading strategy for an investment fund which wishes to maintain two assets in fixed proportions, e.g. 60/40 in stocks and bonds. Transactions costs are assumed to be proportional to the amount of each asset traded. We show that the optimal policy involves a band about the...

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...

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,...

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...

We consider multiple activities with imperfectly correlated stochastic cash flows and zero operational synergies. These activities may be incorporated separately with their own debt/equity structures, or combined (merged) into a corporation with a single debt/equity structure. In a Modigliani -...

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...

We examine the optimal trading strategy for an investment fund which in the absence of transactions costs would like to maintain assets in exogenously fixed proportions, e.g. 60/30/10 in stocks, bonds and cash. Transactions costs are assumed to be proportional, but may differ with buying and...

We examine the optimal trading strategy for an investment fund which wishes to maintain two assets in fixed proportions, e.g. 60/40 in stocks and bonds. Transactions costs are assumed to be proportional to the amount of each asset traded. We show that the optimal policy involves a band about the...