Working papers
Research interests: Optimal capital structure, corporate investment policy, capital markets with asymmetric information, valuation, real options analysis, dynamic corporate finance, employee stock options, incentive problems, ambiguous information and information quality, private equity and venture capital.
Detecting Determinants of Capital Structure, 2021 (submitted)
with Kirstine Boye Petersen
Using a dynamic capital structure model with investments we show that interdependence between profitability and assets creates challenges for empirical studies. Our model reveals that initial leverage explains variation in leverage, but only if the interdependence between the determinants are not accounted for. It also generates a seemingly persistent leverage effect even though we do not include mean reversion or similar elements. We suggest a simple method to address some of the interdependence between determinants. Our empirical analysis shows that profitability, market-to-book, and industry median leverage are important capital structure determinants, but initial leverage is not.
Callable or convertible debt? The role of debt overhang and covenants, 2022. (forthcoming, Journal of Corporate Finance)
with Kirstine Boye Petersen and Alexander Schandlbauer
We analyze what role debt overhang and covenants have in affecting a manager’s choice between issuing callable or convertible debt. Callable bonds provide a higher coupon to bondholders in exchange for a firm’s repurchase option of its claim, whereas convertible bonds offer bondholders the option to exchange debt to equity. Using a dynamic capital structure theory model with an investment choice, we show that firms which are more exposed to debt overhang issue callable rather than convertible bonds. However, convertible bonds are preferred if the firm has more debt. Furthermore, if bonds have covenants attached, callable bonds are more likely to be issued. Our empirical findings support the theory.
Private Equity Acquisitions and Strategic Buyers: Information Discounts versus Synergies, 2021.
with Peter Norman Sørensen
We characterize when private equity funds have a competitive advantage over strategic buyers in acquiring a target firm. Private equity funds are more inclined to cut loss-making projects, thereby gaining an information advantage for understanding value creation with the target's remaining assets. Strategic buyers more often integrate with the target to obtain synergy gains. Private equity funds are more likely to win takeover competitions when their information advantage is greater, their required return premium is smaller, and strategic buyers' synergy gains are smaller. Such takeovers by private equity funds can improve economic welfare.
Bank Regulation and Horizon Effects on Project Choice, 2020 (submitted)
(earlier title: Credit Crunched Regulated Banks)
with Linda Sandris Larsen
We analyze how regulation of banks impacts a bank's choice among projects in a dynamic framework. We show that regulation impacts investments in different industries differently, and banks may fund more risky projects if they focus on a high return to shareholders. An important lag effect in our model implies that previous investments crowd out new profitable projects. In particular, long-term projects are hampered more than short-term projects at the onset of a recession. Our theory leads to a number of predictions in line with existing empirical studies, but we also point to new testable implications.
Debt Maturity, Callabiltiy, and Dynamic Capital Structure, 2004.
with Jacob Lester
In a dynamic framework, this paper studies a firm’s optimal capital structure choice in terms of the maturity and call premium of the debt. The firm’s capital structure is optimized accordingto a trade-off between a tax advantage of debt, bankruptcy costs and debt issuance costs. The central result of the paper is that the firm issues perpetual debt with a small positive call premium. This implies that debt restructuringis non-deterministic and that the call premium is the key parameter that controls the equity holders’ ex post restructuringincen tives. However, in the special case of non-callable debt we generally find that finite maturity is optimal.
Work in Progress
Green Finance: Real Option Value vs. Direct Subsidies,. 2020, with Kevin berg Grell (University of Southern Denmark and California State Polytechnic University).
Private Equity Acquisitions, Investment Policy, and Time to Signal, 2021, with Charlotte Sun Clausen-Jørgesen
Mean Reverting Earnings, Debt, and Corporate Investments, 2021, with Kristian Debrabant
Debt Overhang, Cash Holdings, and Investment, 2021, with Stefan Hirth (University of Southern Denmark and Aarhus University)
Industry equilibria with blockchain, 2021, with S. Hirth, E. Lyandres, and A. Schandlbauer (University of Southern Denmark, Aarhus University, and Tel Aviv University)
Project Valuation and Investment Decisions with Available Information, 2013, with Ian A. Cooper