Optimal Time-Consistent Debt Policies

Clicks: 21
ID: 329043
2026
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Abstract
Abstract We study a dynamic trade-off model where shareholders can freely adjust debt but lack commitment to future debt policies. A debt policy is time-consistent if shareholders prefer it to deviating and losing credibility ex post. We characterize the optimal time-consistent policy in a class. It includes a stable regime, where shareholders actively manage liabilities to maintain the target interest coverage ratio, and a distress regime triggered by large negative shocks, where shareholders temporarily abandon the target. This policy has realistic properties and bridges the gap between the static trade-off theory of debt and theory based on the leverage ratchet effect. (JEL G32, C73)
Reference Key
openalex_W7213533160 Use this key to autocite in the manuscript while using SciMatic Manuscript Manager or Thesis Manager
Authors Andrey Malenko, Anton Tsoy
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Journal review of financial studies
Year 2026
DOI
10.1093/rfs/hhag083
URL
https://doi.org/10.1093/rfs/hhag083
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