BAFI & OPER Seminar-Ritchken Wu
Capital Structure with Asset Flexibility
Speaker(s): Peter Ritchken
Date & Time: Thursday, Oct. 29, 2015 from 1:30 p.m. to 3 p.m.
We study the impact of asset flexibility on the design of an optimal capital structure in a dynamic model where the firm has multiple debt issues and equityholders choose the timing and financing of future growth options as well as the operating policy of assets in place. We show that all things being equal, profitable firms with flexible assets exercise their growth options earlier, use less debt and will typically be less leveraged than otherwise identical firms with no asset flexibility. When asset flexibility allows risk shifting possibilities, growth options are exercised even earlier and leverage is even lower. The very lowest leverage firms are those with profitable flexible assets and large and relatively inexpensive growth options.
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Peter B. Lewis Building Room 220
11119 Bellflower Road
Cleveland, OH 44106-7235
Attachment: Ritchken, Wu paper