Leverage Dynamics without Commitment

Peter DeMarzo, Zhiguo He

In our model, leverage is dependent on the full history of the firm's earnings. Despite the absence of transactions costs, an increase in profitability causes leverage to decline in the short-run, but the rate of new debt issuance endogenously increases so that leverage ultimately mean-reverts. The target level of leverage, and the speed of adjustment depends critically on debt maturity; nonetheless, in equilibrium shareholders are indifferent toward the debt maturity structure

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Year of publication:	November 2016
Authors:	DeMarzo, Peter
Other Persons:	He, Zhiguo (contributor)
Institutions:	National Bureau of Economic Research (contributor)
Publisher:	Cambridge, Mass : National Bureau of Economic Research
Subject:	Theorie \| Theory \| Kapitalstruktur \| Capital structure \| Dynamisches Gleichgewicht \| Dynamic equilibrium \| Markov-Kette \| Markov chain \| Cash Flow \| Cash flow \| Fälligkeit \| Maturity

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