Haas School of Business, University of California, Berkeley. The author thanks Ronald Anderson, Fischer Black, Arnoud Boot, Michael Brennan, Philip Dybvig, Julian Franks, Robert Gertner, William Perraudin, Matthew Spiegel, Suresh Sundaresan, Ivo Welch, and especially Rob Heinkel and Klaus Toft for helpful comments. The referee and the editor, René Stulz, provided many valuable suggestions.
Corporate Debt Value, Bond Covenants, and Optimal Capital Structure
Article first published online: 30 APR 2012
1994 The American Finance Association
The Journal of Finance
Volume 49, Issue 4, pages 1213–1252, September 1994
How to Cite
LELAND, H. E. (1994), Corporate Debt Value, Bond Covenants, and Optimal Capital Structure. The Journal of Finance, 49: 1213–1252. doi: 10.1111/j.1540-6261.1994.tb02452.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
This article examines corporate debt values and capital structure in a unified analytical framework. It derives closed-form results for the value of long-term risky debt and yield spreads, and for optimal capital structure, when firm asset value follows a diffusion process with constant volatility. Debt values and optimal leverage are explicitly linked to firm risk, taxes, bankruptcy costs, risk-free interest rates, payout rates, and bond covenants. The results elucidate the different behavior of junk bonds versus investment-grade bonds, and aspects of asset substitution, debt repurchase, and debt renegotiation.