Review of Quantitative Finance and Accounting, 26: 177–199, 2006
2006 Springer Science + Business Media, Inc. Manufactured in The Netherlands.
An Integrated Model of Debt Issuance, Refunding,
MANAK C. GUPTA
Professor of Finance, Temple University, 205B Speakman Hall, Fox School of Business, Philadelphia,
PA 19122, Tel: 215-204-8143, Fax: 215-204-1976
ALICE C. LEE
Assistant Professor of Finance, San Francisco State University, 1600 Holloway Avenue, San Francisco,
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.
Key words: debt ﬁnancing, refunding, maturity, simultaneous, multiperiod
JEL Classiﬁcation: G30
Several authors have investigated the theoretical aspects of bond refunding, bond is-
suance, and maturity. Among them, Goswami, Noe and Rebello (1995), Mitchell (1991),
and Barnea, Haugen and Senbet (1980) examine terms of bond issuance; King and Mauer
(2000) and Chiang and Narayanan (1991) bond refunding; Emery (2001) and Barclay
and Smith (1995), Houston and Venkataraman (1994), Stochs and Mauer (1996), and
Brick and Ravid (1991) debt maturity structure. Integrating these developments on the
theoretical front has been a fundamental problem in ﬁnance. We attempt to accomplish
this and extend the work of these and others who have made signiﬁcant contributions in
these areas by developing an integrated model that simultaneously and in a multiperiod
framework takes into account all these choices.
It will hopefully help decision makers
to improve and to make better ﬁnancing decisions with enhanced understanding.
The model presented here develops a uniﬁed framework that simultaneously deter-
mines the optimal debt refunding, debt issuance (long term and short term), and debt
maturity structure policies in a multiperiod framework. Moreover, the model integrates