An Integrated Model of Debt Issuance, Refunding, and Maturity

Authors: Gupta, Manak¹; Lee, Alice²

Source: Review of Quantitative Finance and Accounting, Volume 26, Number 2, March 2006 , pp. 177-199(23)

Publisher: Springer

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Abstract:

We integrate previous work in this area and develop a multiperiod model that simultaneously determines bond refunding, bond issuance, maturity structure, cash holdings, and bank borrowing policies. The focus here is on providing the required debt funds in the most cost efficient fashion. A strength of the model is that it allows for time varying interest costs, transaction costs, issuance costs, and refunding costs to be firm specific. The output of the model lays out the optimal financing decisions for each time interval that minimize the total discounted cost of providing the funds that match the requisite funds. By limiting the surplus funds available, the model minimizes the management incentive to over invest and thereby reduces the agency costs. The model has economic implications for the financing decisions and the firm's default risk, growth opportunities, riskiness of cash flows, and firm size.

Keywords: debt financing; refunding; maturity; simultaneous; multiperiod

Document Type: Research article

DOI: http://dx.doi.org/10.1007/s11156-006-7215-y

Affiliations: 1: Email: mcgupta@temple.edu 2: Email: alicelee@sfsu.edu

Publication date: 2006-03-01