The Relation Between Risk and Optimal Debt Maturity and the Value of Leverage

James B. Wiggins

25 citations0/0 files storedJournal of Financial and Quantitative Analysis

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Corporate Finance and Governance Corporate Insolvency and Governance Financial Reporting and Valuation Research

Abstract

This paper considers the capital structure and debt maturity choice for a value-maximizing corporation. In the model, interest expense is tax deductible, bankruptcy is costly, and debt is fairly priced at issue. In contrast to the results of Kane, Marcus, and McDonald (1985), optimal debt maturity does not always approach zero in the absence of transaction costs, and is increasing in the volatility of the assets of the firm. The model predicts a positive association between the value of leverage and total risk in some circumstances.

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1973The Pricing of Options and Corporate Liabilities 1976The valuation of options for alternative stochastic processes 1989Dynamic Capital Structure Choice: Theory and Tests 1976The option pricing model and the risk factor of stock 1986Asymmetric Information and Risky Debt Maturity Choice 1971A PURE FINANCIAL RATIONALE FOR THE CONGLOMERATE MERGER 1980A RATIONALE FOR DEBT MATURITY STRUCTURE AND CALL PROVISIONS IN THE AGENCY THEORETIC FRAMEWORK 1978THE INSIGNIFICANCE OF BANKRUPTCY COSTS TO THE THEORY OF OPTIMAL CAPITAL STRUCTURE

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2001Debt, tax shield and bankruptcy costs: Some evidence from JSE

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