An Integrated Model of Debt Issuance, Refunding, and Maturity

An Integrated Model of Debt Issuance, Refunding, and Maturity We integrate previous work in this area and develop a multiperiod model that simultaneously determines bond refunding, bond issuance, maturity structure, cash holdings, and bank borrowing policies. The focus here is on providing the required debt funds in the most cost efficient fashion. A strength of the model is that it allows for time varying interest costs, transaction costs, issuance costs, and refunding costs to be firm specific. The output of the model lays out the optimal financing decisions for each time interval that minimize the total discounted cost of providing the funds that match the requisite funds. By limiting the surplus funds available, the model minimizes the management incentive to over invest and thereby reduces the agency costs. The model has economic implications for the financing decisions and the firm's default risk, growth opportunities, riskiness of cash flows, and firm size. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

An Integrated Model of Debt Issuance, Refunding, and Maturity

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2006 by Springer Science + Business Media, Inc.
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-006-7215-y
Publisher site
See Article on Publisher Site

Abstract

We integrate previous work in this area and develop a multiperiod model that simultaneously determines bond refunding, bond issuance, maturity structure, cash holdings, and bank borrowing policies. The focus here is on providing the required debt funds in the most cost efficient fashion. A strength of the model is that it allows for time varying interest costs, transaction costs, issuance costs, and refunding costs to be firm specific. The output of the model lays out the optimal financing decisions for each time interval that minimize the total discounted cost of providing the funds that match the requisite funds. By limiting the surplus funds available, the model minimizes the management incentive to over invest and thereby reduces the agency costs. The model has economic implications for the financing decisions and the firm's default risk, growth opportunities, riskiness of cash flows, and firm size.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Jan 1, 2006

References

  • The Joint Determination of Leverage and Maturity
    Barclay, M. J.; Marx, L. M.; Smith, C. W.
  • The Maturity Structure of Corporate Debt
    Barclay, E. I.; Smith, C. W.
  • A Rationale for Debt Maturity Structure and Call Provisions in the Agency Theoretic Framework
    Barnea, A.; Haugen, R. A.; Senbet, L. W.
  • Tax Differentials and Callable Bonds
    Boyce, W. M.; Kalotay, A. J.
  • Interest Rate Uncertainty and Optimal Debt Maturity Structure
    Brick, I. E.; Ravid, S. A.

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