Dynamic optimal capital structure with regime switching (Q2351636)

The authors investigate the optimal structure of a corporate when the dynamics of the assets change following different states of economy. Two structural models are examined in the paper: one considers the case when the firm is not facing tax benefit and bankruptcy costs, and the second one considers the case with tax benefits and bankruptcy costs, both with regime-switching dynamics. The authors obtain closed-form analytic solutions for the optimal capital structure and default barrier for both models.