The Leland-Toft optimal capital structure model under Poisson observations

2019/04/06 by Zbigniew Palmowski, José Luis Pérez, Palmowski, Zbigniew +6
Business, Management and Accounting · Economics, Econometrics and Finance · Mathematics · #Banking stability, regulation, efficiency #Corporate Finance and Governance #Credit Risk and Financial Regulations #FOS: Economics and business #FOS: Mathematics #Pricing of Securities (q-fin.PR) #Probability (math.PR) #math.PR #q-fin.PR

paper · pdf · doi:10.48550/arxiv.1904.03356

Forthcoming in Finance and Stochastics

openalex publication_date 2019/04/06 · arxiv created 2020/03/31 · arxiv updated 2020/04/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28

Abstract

We revisit the optimal capital structure model with endogenous bankruptcy first studied by Leland \citeLeland94 and Leland and Toft \citeLeland96. Differently from the standard case, where shareholders observe continuously the asset value and bankruptcy is executed instantaneously without delay, we assume that the information of the asset value is updated only at intervals, modeled by the jump times of an independent Poisson process. Under the spectrally negative Lévy model, we obtain the optimal bankruptcy strategy and the corresponding capital structure. A series of numerical studies are given to analyze the sensitivity of observation frequency on the optimal solutions, the optimal leverage and the credit spreads.

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