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Research Abstracts Online
January 2010 - March 2011

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University of Minnesota Twin Cities
Curtis L. Carlson School of Management
Department of Finance

PI: Murray Z. Frank

A Dynamic Model of Capital Structure

Existing dynamic trade-off models of capital structure have been relatively unsuccessful in explaining the time series properties, i.e. the frequency of issuance and the amount issued, of debt market activities of firms. These researchers are constructing a model with a real friction to address this failure. The model is a dynamic trade-off model with endogenous choice of dividend, debt, and investment in the presence of corporate taxation and costly bankruptcy. The real friction in the model is the stochastic nature of investment opportunities, which are modeled as arrival of projects. The firm may not have enough internal financing, and so may need to make use of external finance in the form of equity and/or debt if a profitable project arrives.

Group Member

Pedram Nezafat, Graduate Student