Lecture information
Lecture topic
Leverage Dynamics under Costly Equity Issuance
Speaker
Yang Jinqiang,
Professor, School of Finance, Shanghai University of Finance and Economics
Moderator
Zou Kunru, Assistant
professor, School of Finance, Renmin University of China
Lecture Time
10:00, Friday,
Dec.22nd, 2023
Lecture Venue
515A Room,
Mingde Main Building, Renmin University of China
Abstract
We propose a
parsimonious model of leverage and investment dynamics featuring a
jump-diffusion cash-flow process, retained earnings, short-term debt, and
external equity. Crucially equity issuance is costly. We show that firms’
efforts to avoid incurring equity issuance costs generate empirically plausible
target leverage and nonlinear leverage dynamics. Paradoxically, it is the fixed
cost of equity issuance that causes the firm to keep leverage low, in contrast
to the predictions of Modigliani-Miller and Leland tradeoff and Myers’
pecking-order theories. The marginal source of external financing on an
on-going basis is debt, but when leverage gets too high, the firm optimally
deleverages by issuing equity at a cost. When leverage is low, it tends to
revert to the target, but when leverage is high, the firm is caught in a debt
death spiral. When the firm is at its target leverage, profits are paid out,
but losses cause leverage to drift up. When leverage is high and the firm is
hit by a large jump loss, it defaults.
Introduction of the speaker
Yang Jinqiang is currently a tenured full
professor, doctoral supervisor, deputy dean (chair), chief expert of the
university's innovation team and a scholar of excellence in Shanghai University
of Finance and Economics. At the same time, he is also the first batch of
"Chang Jiang Scholar" young scholars of the Ministry of Education,
winner of the National Outstanding Youth Fund, winner of the "New Century
Outstanding Talents Support Program" of the Ministry of Education, winner
of the Huo Yingdong Education Fund. In recent years, he has focused on the
theoretical research of dynamic corporate finance and asset pricing. 86 papers
have been published or accepted to be published in academic journals,
including: 14 papers in international top finance, Economics and comprehensive
journals (3 in Journal of Finance, 3 in Journal of Financial
Economics, 3 in Reviews of Financial Studies, 1 in Econometrica,
2 in Journal of Economic Theory,1 in PNAS,1 in Management
Science). and 52 other papers in internationally renowned SSCI journals
such as Review of Corporate Finance Studies, Journal of
Banking & Finance, 20 papers in domestic authoritative journals. Papers
have been selected for many years in the international top finance conferences
(AFA, WFA, EFA).