Skip Navigation



RFS Advance Access published online on January 4, 2007
Review of Financial Studies, doi:10.1093/revfin/hhl047
This Article
Right arrow Full Text (PDF)
Right arrow All Versions of this Article:
20/5/1389    most recent
hhl047v1
Right arrow Alert me when this article is cited
Right arrow Alert me if a correction is posted
Services
Right arrow Email this article to a friend
Right arrow Similar articles in this journal
Right arrow Alert me to new issues of the journal
Right arrow Add to My Personal Archive
Right arrow Download to citation manager
Right arrowRequest Permissions
Google Scholar
Right arrow Articles by Hackbarth, D.
Right arrow Articles by Leland, H. E.
Right arrow Search for Related Content
Social Bookmarking
Add to CiteULike   Add to Connotea   Add to Del.icio.us  
What's this?

Copyright © The Author 2007. Published by Oxford University Press on behalf of The Society for Financial Studies.

Can the Tradeoff Theory Explain Debt Structure?

Dirk Hackbarth, Christopher A. Hennessy and Hayne E. Leland
Washington University in St. Louis
U.C. Berkeley

hackbarth{at}wustl.edu

We examine the optimal mixture and priority structure of bank and market debt using a tradeoff model where banks have the unique ability to renegotiate outside formal bankruptcy. Flexible bank debt offers a superior tradeoff between tax shields and bankruptcy costs. Ease of renegotiation limits bank debt capacity, however. Optimal debt structure hinges upon which party has bargaining power in private workouts. Weak firms have high bank debt capacity and utilize bank debt exclusively. Strong firms lever up to their (lower) bank debt capacity, augment with market debt, and place the bank senior. Therefore, the tradeoff theory offers an explanation for: (i) why young/small firms use bank debt exclusively; (ii) why large/mature firms employ mixed debt financing; and (iii) why bank debt is senior. The tradeoff theory also generates predictions consistent with international evidence. In countries where the bankruptcy regime entails soft (tough) enforcement of contractual priority, bank debt capacity is low (high), implying greater (less) reliance on market debt. JEL Codes: G13, G32, G33.


Add to CiteULike CiteULike   Add to Connotea Connotea   Add to Del.icio.us Del.icio.us    What's this?


This article has been cited by other articles:


Home page
 REV FINANC STUDHome page
H. S. Bhamra, L.-A. Kuehn, and I. A. Strebulaev
The Levered Equity Risk Premium and Credit Spreads: A Unified Framework
Rev. Financ. Stud., October 26, 2009; (2009) hhp082v1.
[Abstract] [Full Text] [PDF]


Disclaimer: Please note that abstracts for content published before 1996 were created through digital scanning and may therefore not exactly replicate the text of the original print issues. All efforts have been made to ensure accuracy, but the Publisher will not be held responsible for any remaining inaccuracies. If you require any further clarification, please contact our Customer Services Department.