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).