ABSTRACT
In this chapter, I focus on researchers’ attempts to develop quantitative models using continuous-time approach. Classic models I cover in earlier chapters are used to provide qualitative guidance, but they are less useful for acquiring quantitative implication. To overcome this concern, researchers in corporate capital structure utilize derivative valuation model to simulate the realistic valuation of equity and debt. Then, they have been updating traditional frameworks I cover in earlier chapters. First, I cover Merton (1974) and derive the irrelevance of capital structure as in Chapter 2. Second, I cover Leland (1994), which is the quantitative version of static trade-off theory I cover in Chapter 3, and show firms determine capital structure by trading off bankruptcy costs and the tax benefit of debt.
