| This research classifies corporate restructuring activities as internal and external, and deals with the optimal internal restructuring strategies and their multi-faceted effects on a firm's security values. The dissertation consists of three major chapters.; Chapter 1 surveys the restructuring literature and compares various modeling approaches and solutions that constitute the foundation upon which this research builds.; Chapter 2 introduces the concept of quasi-leverage and builds valuation models for corporate debt and equity under imperfect market conditions. The model's input variables include the quasi-leverage and other firm-specific parameters; the output variables include corporate security values and optimal financing strategies featured by the initial optimal leverage ratio, coupon rate of corporate debt, leverage span, and the rate of return surplus on the unlevered assets. The closed-form solutions to these models facilitate the dynamic analyses of optimal financing strategies and comparative statics of various restructuring variables that include the firm's unlevered assets, instantaneous corporate and personal tax rates, bankruptcy costs, restructuring costs, firm risk, and risk-less interest rate.; Chapter 3 conducts empirical research that is designed to test some of the theoretical results from Chapter 2. The research employs a logarithmic regression method to find the relations between the different measures of capital structure and possible explanatory variables. Comparison of the regression results for six possible model specifications yielded one that fits the theory very closely. As an integral part of the empirical research, in Section 3.3 the agency problem is formulated in a decision analysis framework. I devised a management incentive scenario that makes the incumbent manager indifferent between the debt and equity financing alternatives, so as to eliminate the associated agency cost. |
