dynamic capital structure research paper

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A Control Theory of Dynamic Capital Structure

This paper develops a model in which debt serves to constrain inefficient investments of empire building managers due to the consequent control implications of bankruptcy. Unlike related free cash flow models, capital structure is voluntarily chosen by the management, as a credible constraint which ensures sufficient efficiency to prevent takeover challenges. In particular, dynamic capital structure is derived as the optimal response of partially entrenched empire-building managers to control considerations; managers trade off empire building ambitions with the need to retain the empire to realize these ambitions. Such capital structure is dynamically consistent; in the model, managers are free to read just leverage each period. In deriving a dynamic managerial optimal capital structure, a policy of dividend payments coordinated with capital structure decisions follows naturally. Thus unlike free cash flow models, this model can explain why debt-constrained empire-building managers voluntarily choose to pay dividends and do not reverse restrictive debt imposed upon them by others. The model yields implications for debt level, frequency and term structure as a function of outside investment opportunities and the degree of managerial encroachment.

An Ebit-Based Model of Dynamic Capital Structure

Dice Center For Research In Financial Economics Working Paper No. 98-13

40 Pages Posted: 24 Oct 1998

Robert S. Goldstein

University of Minnesota - Twin Cities - Carlson School of Management; National Bureau of Economic Research (NBER)

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Hayne E. Leland

University of California, Berkeley - Walter A. Haas School of Business

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 relationship between the levered and unlevered firm value at the moment of a capital structure change. Moreover, these frameworks imply that the role of government is to create a 'tax benefit' cash-flow into a firm, when in practice much of the cash that flows out of a firm is typically paid to government via taxes. To circumvent these difficulties, we take the claim to future EBIT as the underlying state variable, and assume that it is invariant to changes in capital structure. In such a framework, all claims to EBIT (equity, debt, government) are treated in a consistent fashion. In particular, the government claim is correctly modeled as an outflow of EBIT via taxes, rather than as an inflow of 'tax benefits'. This distinction dramatically affects the payout ratio, which in turn affects both the probability of bankruptcy and predicted yield spreads. In addition, the invariance feature of the state variable makes this framework ideal for investigating optimal dynamic capital structure strategy. When firms are permitted to increase their level of outstanding debt in the future, predicted leverage ratios are consistent with those observed.

JEL Classification: G31, G32

Suggested Citation: Suggested Citation

Robert S. Goldstein (Contact Author)

University of minnesota - twin cities - carlson school of management ( email ).

19th Avenue South Minneapolis, MN 55455 United States 612-624-8581 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue Cambridge, MA 02138 United States

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University 211 West Huaihai Road Shanghai, 200030 China

University of California, Berkeley - Walter A. Haas School of Business ( email )

Haas School of Business 545 Student Services Building Berkeley, CA 94720 United States (510) 642-8694 (Phone) (510) 643-1420 (Fax)

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Asia Pacific Management Review

Dynamic capital structure in indonesia: does the education and experience of ceos matter.

Based on the Upper Echelon Theory, this paper examined the relationship of CEO education and experience with the dynamic capital structure (DCS) using the target leverage and speed of adjustment (SOA) models. This study applied the system generalised method of moments (SYS-GMM) to the target leverage model and Ordinary Least Squares bootstrapped standard errors to the speed of adjustment model. Using the 100 Indonesian firms, two notable findings were obtained. First, the target leverage model with the inclusion of CEO characteristics yielded a 22% of the SOA towards target leverage. Both variables showed a positive relationship with the target leverage. Second, the result revealed that the improvement of CEO education and experience by one standard deviation led to an increase in the SOA by 3.37% and 0.17%. Thus, the results were consistent with the theory whereby the education and experience of the CEOs were potential determinants the DCS.

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Establishing a dynamic capital structure model for company sustainability performance using data mining techniques.

1. Introduction

2. literature review, 2.1. dynamic capital structure, 2.2. the relationship between capital structure and company performance, 2.3. data mining, 3. the methodology, 3.1. the framework of mining dynamic capital structures and company performance, 3.2. definition of variables, 3.3. decision tree, 3.4. association rules, 4.1. decision tree analysis, 4.1.1. tobin’s q decision tree, 4.1.2. roa decision tree, 4.1.3. roe decision tree, 4.2. associate rules analysis, 4.2.1. tobin’s q association rules, 4.2.2. roa association rules, 4.2.3. roe association rules, 5. conclusions.

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Institutional review board statement, informed consent statement, data availability statement, conflicts of interest, ethical approval.

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Huang, M.-J.; Cheng, K.-C.; Huang, C.-J.; Lin, K.-M.; Wang, H.-M.; Chuang, C.-K.; Wu, M.-C. Establishing a Dynamic Capital Structure Model for Company Sustainability Performance Using Data Mining Techniques. Sustainability 2021 , 13 , 6026. https://doi.org/10.3390/su13116026

Huang M-J, Cheng K-C, Huang C-J, Lin K-M, Wang H-M, Chuang C-K, Wu M-C. Establishing a Dynamic Capital Structure Model for Company Sustainability Performance Using Data Mining Techniques. Sustainability . 2021; 13(11):6026. https://doi.org/10.3390/su13116026

Huang, Mu-Jung, Kuo-Chih Cheng, Ching-Ju Huang, Kun-Meng Lin, Huo-Ming Wang, Cheng-Kuo Chuang, and Ming-Cheng Wu. 2021. "Establishing a Dynamic Capital Structure Model for Company Sustainability Performance Using Data Mining Techniques" Sustainability 13, no. 11: 6026. https://doi.org/10.3390/su13116026

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Dynamic Capital Structure Choice: Theory and Tests
This paper develops a model of dynamic capital structure choice in the ... ence of transactions costs complicates the problem but makes its study even.
An EBIT-Based Model of Dynamic Capital Structure*
long-term debt issues listed in Moody's Bank and Finance Manual and that ... In this article, we determine the optimal capital structure strategy of a firm.
A Control Theory of Dynamic Capital Structure
Such capital structure is dynamically consistent; in the model, managers are free to read just leverage each period. In deriving a dynamic managerial optimal
Dynamic Capital Structure
Capital structure decisions are always dynamic in practice, ... Paper list: ... bankruptcy, and the term structure of credit spreads, Journal of Finance 51
(PDF) Dynamic capital structure determinants: Some evidence from
Capital expenditure is positively correlated to leverage, while asset tangibility and retention rate are negatively correlated to leverage.
An Ebit-Based Model of Dynamic Capital Structure
In addition, the invariance feature of the state variable makes this framework ideal for investigating optimal dynamic capital structure strategy. When firms
Dynamic capital structure under changing market conditions in the
We study dynamics of capital structure in the oil sector, which has witnessed dramatic changes in the market conditions, such as significant changes in the
Dynamic capital structure in Indonesia: Does the education and
This study applied the system generalised method of moments (SYS-GMM) to the target leverage model and Ordinary Least Squares bootstrapped standard errors to
Dynamic Capital Structure Choice: Theory and Tests
In their model, a firm cannot adjust its capital structure before the outstanding debt becomes due. In our paper, firms can recapitalize at any point in time
Establishing a Dynamic Capital Structure Model for Company
In order to reconsider the changes of adjustment speed caused by the recapitalization cost, this research adopted dynamic capital structure theory with