1. Debt Dynamics
Christopher A. Hennessy & Toni M. Whited
胡力川

2. Brief Structure of Main Sections
Literature Review
I. Basic Argument
II. The Model
III. Optimal Financial
Policy
IV. Optimal Real Investment
V. Simulation
VI. Simulated Moments
Parameter Estimation

3. Abstract of Literature Review
Miller(1977):perpetual tax shield formula；static trade-off theory
Inconsistence in empirical sphere
Graham(2000):fact: conservatism in large liquid profitable firms
Myers(1993):inverse correlation between leverage and profitability
Baker & Wurgler(2002): capital structure is the cumulative outcome of attempts
to time the equity market
To explain the styled facts and address the anomalies
Using A Dynamic Model

4. Abstract of Literature Review
The Logic of Argument
On the contrary to the traditional formulations, firms evolve in a stochastic way, finding themselves at different financing margins over time.
Comparisons and Relations With the Other Related Papers
Such as Gomes(2001), Leary & Roberts(2004a), Shyam-Sunder & Myers(1999)
The Necessity and Objective to Bridging the Divide Between Theory and Data

5. I. The Basic Argument
Choice 1/2: the choice between debt and external equity depends upon the firm’s expected equity regime next period
the meaning of main characters
--- constant tax rates on corporate income
--- constant tax rates on individual interest income
--- constant tax rates on corporate distributions
r the rate of return on the taxable riskless Treasury bill
Reducing debt by one dollar increases next period’s distribution by 1+r(1- ), with the shareholder receiving the following amount after distribution taxes:
1+r( )( )

6. I. The Basic Argument the meaning of main characters
λ --- flotation costs
--- constant tax rates on individual interest income
Reducing debt by one dollar requires the shareholder to give up 1+ λ in the current period. If the shareholder had been able to invest these funds on his own account:
(1+ λ)[ 1+r( )]
In this context, it is better to leave the debt outstanding if τc > τi. Conversely, when τc < τi, the optimal policy is to issue sufficient equity to retire all debt.

7. I. The Basic Argument
Choice 2/2: the choice between retention and distribution of excess funds
If the funds are distributed today, the shareholder receives (1-τd). By investing the funds on his own account, the shareholder receives the following amount next period:
(1 − τd )[1 + r(1 − τi)].
In contrast, if the funds are retained for the purpose of corporate saving, the shareholder receives the following amount next period after distribution taxes:
(1 − τd )[1 + r(1 − τc)].
In this context, it is better to distribute and reduce internal savings, if τc > τi. The shareholder prefers the firm to distribute the funds if he can invest at a higher after-tax rate of return than the corporation.

8. I. The Basic Argument Preliminary findings
The optimal financial policy and target marginal corporate tax rate depend on the firm’s current equity regime and expectations regarding next period’s equity regime.
The optimal financial policy is with path dependence

9. emmmm…… Section II: The Model Section III: Optimal Financial Policy
Section IV: Optimal Real Investment Policy
Section V: Simulation
Section VI: Simulated Moments Parameter Estimation
emmmm……

10. Sections III-VI III: Leverage is predicted to exhibit hysteresis.
With higher lagged debt, more debt must be issued.
IV: Low opportunity cost means stronger incentive to invest.
V: Firms with higher debt usually choose a lower desired capital stock.
Large firms with low profit shocks tend to hold the most cash.
The debt rule displays substantial persistence Only the firms with a small capital stock and a large negative shock
will engage in fire sales.
VI: Proves the estimation procedure does a good job of matching almost
all of the moments and investment to Q.

11. VII. Conclusion The main part:
The theoretical and empirical results underline the importance of
understanding corporate financial decisions in dynamic settings, as
well as the importance of having a tight connection between
theory and empirical work.

12. Thanks for your watching