Debt maturity and the leverage ratcheting effect (notice n° 486620)
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| 000 -LEADER | |
|---|---|
| fixed length control field | 02179cam a2200229 4500500 |
| 005 - DATE AND TIME OF LATEST TRANSACTION | |
| control field | 20250121072440.0 |
| 041 ## - LANGUAGE CODE | |
| Language code of text/sound track or separate title | fre |
| 042 ## - AUTHENTICATION CODE | |
| Authentication code | dc |
| 100 10 - MAIN ENTRY--PERSONAL NAME | |
| Personal name | Leland, Hayne |
| Relator term | author |
| 245 00 - TITLE STATEMENT | |
| Title | Debt maturity and the leverage ratcheting effect |
| 260 ## - PUBLICATION, DISTRIBUTION, ETC. | |
| Date of publication, distribution, etc. | 2019.<br/> |
| 500 ## - GENERAL NOTE | |
| General note | 22 |
| 520 ## - SUMMARY, ETC. | |
| Summary, etc. | Admati, Demarzo, Hellwig, and Pfleiderer (ADHP, 2018) note that static models of optimal leverage have assumed firms have no prior debt. In this case, the leverage that maximizes firm value also maximizes value to the initial equity owners. However, using a simple two-period model with zero coupon debt and default possible only at maturity, ADHP prove two startling results: (i) when prior debt is extant, it will never benefit equity holders to retire debt, no matter how high the current leverage; and (ii) it will be in the equity owners’ interest to issue sequential rounds of additional debt, until all the tax advantages of debt are exhausted: the “Leverage Ratcheting Effect” (LRE). An immediate conclusion is that one-round (static) models of optimal debt issuance with no prior debt provide poor guidance as to a firm’s optimal leverage. We examine these contentions using an alternative model of debt, with rollover at a proportional rate m and average maturity = 1/ m, introduced in Leland (1994a). We show that when the average maturity of debt is substantially longer than 5 years, considerable further debt will indeed be issued, although issuance ceases well before tax benefits are exhausted. With 5-year average maturity, very little additional debt is issued under reasonable calibrations. With 3-year average maturity, no additional debt is issued and it may actually be optimal for the firm to buy back debt, in contradiction to the LRE. We explain why our model gives differing results. |
| 690 ## - LOCAL SUBJECT ADDED ENTRY--TOPICAL TERM (OCLC, RLIN) | |
| Topical term or geographic name as entry element | commitment |
| 690 ## - LOCAL SUBJECT ADDED ENTRY--TOPICAL TERM (OCLC, RLIN) | |
| Topical term or geographic name as entry element | capital structure |
| 690 ## - LOCAL SUBJECT ADDED ENTRY--TOPICAL TERM (OCLC, RLIN) | |
| Topical term or geographic name as entry element | leverage ratcheting |
| 690 ## - LOCAL SUBJECT ADDED ENTRY--TOPICAL TERM (OCLC, RLIN) | |
| Topical term or geographic name as entry element | tradeoff theory |
| 690 ## - LOCAL SUBJECT ADDED ENTRY--TOPICAL TERM (OCLC, RLIN) | |
| Topical term or geographic name as entry element | debt maturity |
| 700 10 - ADDED ENTRY--PERSONAL NAME | |
| Personal name | Hackbarth, Dirk |
| Relator term | author |
| 786 0# - DATA SOURCE ENTRY | |
| Note | Finance | 40 | 3 | 2019-12-18 | p. 13-44 | 0752-6180 |
| 856 41 - ELECTRONIC LOCATION AND ACCESS | |
| Uniform Resource Identifier | <a href="https://shs.cairn.info/journal-finance-2019-3-page-13?lang=en&redirect-ssocas=7080">https://shs.cairn.info/journal-finance-2019-3-page-13?lang=en&redirect-ssocas=7080</a> |
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