Research On Debt Commitment Friction And Dynamic Deb

The financing decision is the core determinant of capital structure.Among others,the commitment mechanism is a crucial factor in determining dynamic financing decisions.Demarzo [56] points out that dynamic leverage choice is fundamentally a commitment problem.Build on this novel mechanism,this essay applies mathematical modeling,numerical analysis,dynamic programming,and economic analysis to further investigates the leverage dynamics and their implications.In particular,based on the theory of dynamic trade-offs,this dissertation studies the effects of ambiguity,present-biased preferences,outside options,and debt adjustment costs on dynamic financing decisions and their implications on other corporate policies.First,this dissertation relaxes the assumption that the decision-makers(DM)have full confidence in the decision model.Instead,the first part assumes that DM lacks perfect information towards the cash flow distribution.Then,this dissertation uses numerical analysis to study the robust dynamics of corporate leverage.Facing model uncertainty,ambiguity-averse creditor depresses the bond price until credit spread is sufficient to compensate for the uncertainty.However,the firm without commitment can fully hedge the creditor side ambiguity concern by active debt repurchase.As a result,the ambiguity-induced devaluation only stems from shareholder’s belief distortion.This paper points out that higher leverage makes shareholders more optimistic but escalates creditor’s pessimism,this endogenous disagreement determines the ambiguity sharing motive between two parties.Moreover,the robust debt policy critically depends on(a)the optimal ambiguity sharing and(b)the price impact distortion.Finally,volatility and model uncertainty have distinctive implications,(a)the target leverage-volatility relationship exhibits Ushape in the presence of ambiguity,(b)model uncertainty smooths the risk-taking incentives.Second,this dissertation introduces the quasi-hyperbolic discount function to model the present-biased preferences and investigates the impacts of the government’s present bias on the optimal debt policy in the no-commitment equilibrium.In the baseline model with rational government,it is optimal to remain passive in the debt market.Unlike the baseline model,the present-biased government chooses to issue debt in the normal economic states,as it can capture the benefits of frontloading consumption through debt issuance.By contrast,in the distressed region,the government actively repurchases the outstanding debt to reduce the default risks.Moreover,the higher degree of myopia exacerbates debt issuance incentives while it imposes a non-monotonic effect on the debt repurchase motive.Besides,we find that leverage commitment can ameliorate the negative impacts of the government’s present-biased preferences.Third,this part assumes that equity holders have an outside option.That is,equity holders can adjust the firm’s debt policy according to the firm’s operating cash flows.When the cash flows are sufficiently high,equity holders choose a rigid debt issuance policy to keep the face value of the outstanding debt fixed.However,for the firm in financial distress,rollover risk becomes the primary consideration so that equity holders choose the flexible debt issuance policy,which enables equity holders to adjust debt freely and so increases the financial flexibility.The results show that compared with firms using flexible debt policies or rigid debt policies,this endogenous commitment mechanism not only increases equity value and debt prices but also brings higher total firm value.Besides,in the capital market with short-term debt and high volatility,this endogenous commitment mechanism plays a vital role in helping the firm with the financial crisis.Finally,this dissertation introduces debt adjustment costs,investigates the commitment to firm-optimal,and further explores its implications on the firm’s endogenous investment decisions and risk management decisions.The results show that in the presence of debt adjustment costs,equity holders without commitment only have incentives to issue debt.In stark contrast,the firm-optimal debt policy internalizes the impact of leverage on debt prices,resulting in the acceleration of debt repayment and even debt buyback in financial distress.Finally,this dissertation finds that the firm-optimal debt policy increases the default threshold.In particular,sufficiently high debt adjustment costs and short debt maturities increases total firm value in the no-commitment equilibrium,thus lowering the commitment value.