Abstract
We investigate equilibrium debt dynamics for a firm that cannot commit to a future debt policy and is subject to a fixed restructuring cost. We formally characterize equilibria when the firm is not required to repurchase outstanding debt prior to issuing additional debt. For realistic values of issuance costs and debt maturity, the no-commitment policy generates tax benefits that are similar to those obtained by a benchmark policy with commitment. For positive but arbitrarily small issuance costs, there are maturities for which shareholders extract essentially the entire claim to cash-flows.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 385-402 |
| Number of pages | 18 |
| Journal | Journal of Financial Economics |
| Volume | 146 |
| Issue number | 2 |
| DOIs | |
| State | Published - Nov 2022 |
Bibliographical note
Funding Information:☆ Toni Whited was the editor for this article. We are grateful to the editor and an anonymous referee for helpful comments. We also thank Hengjie Ai, Kerry Back, Markus Baldauf, Marco Bassetto, Maria Chaderina, Thomas Dangl, Peter DeMarzo, Murray Frank, Ron Giammarino, Will Gornall, Zhiguo He, Ravi Jagannathan, Charles Kahn, Narayana Kocherlakota, Xuelin Li, Dongliang Lu, Erwan Morellec, Chris Neely, Marcus Opp, Christine Parlour, Raj Singh, Martin Szydlowski, Alberto Mokak Teguia, Fabrice Tourre, Yiyao Wang, Ramona Westermann, Andy Winton, Fangyuan Yu, Hongda Zhong, and seminar participants at the 2019 NBER SI Capital Markets meeting, the 2019 CFE Conference, the 2020 SFS Cavalcade, the 2020 Western Finance Association, The Econometric Society/Bocconi University World Congress 2020, the 2020 Northern Finance Association, the University of British Columbia, and the University of Minnesota, for helpful comments. All remaining errors are our own. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Chicago or the Federal Reserve System. Garlappi gratefully acknowledges financial support from the Sauder School of Business Bureau of Asset Management. The Online Appendix is by Julien Hugonnier, EPFL, Swiss Finance Institute, and CEPR, Email: julien.hugonnier@epfl.ch
Funding Information:
Toni Whited was the editor for this article. We are grateful to the editor and an anonymous referee for helpful comments. We also thank Hengjie Ai, Kerry Back, Markus Baldauf, Marco Bassetto, Maria Chaderina, Thomas Dangl, Peter DeMarzo, Murray Frank, Ron Giammarino, Will Gornall, Zhiguo He, Ravi Jagannathan, Charles Kahn, Narayana Kocherlakota, Xuelin Li, Dongliang Lu, Erwan Morellec, Chris Neely, Marcus Opp, Christine Parlour, Raj Singh, Martin Szydlowski, Alberto Mokak Teguia, Fabrice Tourre, Yiyao Wang, Ramona Westermann, Andy Winton, Fangyuan Yu, Hongda Zhong, and seminar participants at the 2019 NBER SI Capital Markets meeting, the 2019 CFE Conference, the 2020 SFS Cavalcade, the 2020 Western Finance Association, The Econometric Society/Bocconi University World Congress 2020, the 2020 Northern Finance Association, the University of British Columbia, and the University of Minnesota, for helpful comments. All remaining errors are our own. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Chicago or the Federal Reserve System. Garlappi gratefully acknowledges financial support from the Sauder School of Business Bureau of Asset Management. The Online Appendix is by Julien Hugonnier, EPFL, Swiss Finance Institute, and CEPR, Email: julien.hugonnier@epfl.ch
Publisher Copyright:
© 2022 Elsevier B.V.
Keywords
- Capital structure
- Commitment
- Debt dynamics
- Debt maturity
- Issuance costs