A Dynamic Model of Optimal Capital Structure
May 2006 McCombs Research Paper Series No. FIN-03-06
A Dynamic Model of Optimal Capital Structure
Sheridan Titman
McCombs School of Business The University of Texas at Austin e-mail: titman@mail.utexas.edu
Sergey Tsyplakov
Moore School of Business The University of South Carolina, Columbia, SC
This paper also can be downloaded without charge from the Social Science Research Network Electronic Paper Collection: http://ssrn.com/abstract/332042
A Dynamic Model of Optimal Capital Structure∗
Sheridan Titman McCombs School of Business Department of Finance University of Texas at Austin Austin, TX 78712-1179. Sergey Tsyplakov Moore School of Business Department of Finance University of South Carolina Columbia, SC 29208
Current Draft: November 2, 2005
∗
Authors’ e-mail addresses are titman@mail.utexas.edu and sergey@moore.sc.edu respectively. Au-
thors would like to thank session participants at the 2004 Meetings of Society of Economic Dynamics, 2002 WFA meetings, 2002 SFA meetings and seminar participants at Arizona State University, Fordham University, Georgia Institute of Technology, Indiana University, Louisiana State University, McGill University, the University of British Columbia, the University of Florida, the University of Miami, the University of Nevada at Las Vegas, the University of South Carolina, the University of Texas and, especially, Andres Almazan, Jeffrey Coles, Lorenzo Garlappi, Ronen Israel, Gerald Jensen, Nengjiu Ju, David Mauer, Ted Moore and Stathis Tompaidis for their valuable comments.
A Dynamic Model of Optimal Capital Structure
Abstract This paper presents a continuous time model of a firm that can dynamically adjust both its capital structure and its investment choices. The model extends the dynamic capital structure literature by endogenizing the investment choice as well as firm value, which are both determined by an exogenous price process that describes the firm’s product market. Within the context of this
A Dynamic Model of Optimal Capital Structure
Sheridan Titman
McCombs School of Business The University of Texas at Austin e-mail: titman@mail.utexas.edu
Sergey Tsyplakov
Moore School of Business The University of South Carolina, Columbia, SC
This paper also can be downloaded without charge from the Social Science Research Network Electronic Paper Collection: http://ssrn.com/abstract/332042
A Dynamic Model of Optimal Capital Structure∗
Sheridan Titman McCombs School of Business Department of Finance University of Texas at Austin Austin, TX 78712-1179. Sergey Tsyplakov Moore School of Business Department of Finance University of South Carolina Columbia, SC 29208
Current Draft: November 2, 2005
∗
Authors’ e-mail addresses are titman@mail.utexas.edu and sergey@moore.sc.edu respectively. Au-
thors would like to thank session participants at the 2004 Meetings of Society of Economic Dynamics, 2002 WFA meetings, 2002 SFA meetings and seminar participants at Arizona State University, Fordham University, Georgia Institute of Technology, Indiana University, Louisiana State University, McGill University, the University of British Columbia, the University of Florida, the University of Miami, the University of Nevada at Las Vegas, the University of South Carolina, the University of Texas and, especially, Andres Almazan, Jeffrey Coles, Lorenzo Garlappi, Ronen Israel, Gerald Jensen, Nengjiu Ju, David Mauer, Ted Moore and Stathis Tompaidis for their valuable comments.
A Dynamic Model of Optimal Capital Structure
Abstract This paper presents a continuous time model of a firm that can dynamically adjust both its capital structure and its investment choices. The model extends the dynamic capital structure literature by endogenizing the investment choice as well as firm value, which are both determined by an exogenous price process that describes the firm’s product market. Within the context of this
References: (12) is different from that of the value maximization problem (17). 38 See, for example, Kushner and Dupuis (1992), Barraquand and Martineau (1995) and Langetieg (1986) for the theory and applications numerical of methods of stochastic control problems.