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Debt Dynamics
Author(s) -
HENNESSY CHRISTOPHER A.,
WHITED TONI M.
Publication year - 2005
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2005.00758.x
Subject(s) - leverage (statistics) , debt , equity (law) , economics , econometrics , financial distress , monetary economics , market liquidity , capital structure , operating leverage , finance , financial system , mathematics , profitability index , statistics , political science , law
We develop a dynamic trade‐off model with endogenous choice of leverage, distributions, and real investment in the presence of a graduated corporate income tax, individual taxes on interest and corporate distributions, financial distress costs, and equity flotation costs. We explain several empirical findings inconsistent with the static trade‐off theory. We show there is no target leverage ratio, firms can be savers or heavily levered, leverage is path dependent, leverage is decreasing in lagged liquidity, and leverage varies negatively with an external finance weighted average Q . Using estimates of structural parameters, we find that simulated model moments match data moments.