Download This PaperThe Kraus-Litzenberger Zero-Sum Trade-Off Theory
6 Pages Posted: 19 Feb 2015
Date Written: February 17, 2015
Abstract
This paper proves that the objective function by Kraus and Litzenberger (1973) is always zero. Hence, any traded off must be zero-sum. Their inclusion of the bankruptcy variable belongs to the creditor, not the firm. This paper then works out another version of trade off: one between debt and equity, and shows that such trade off is rarely one-sided, or comes to an equilibrium.
Keywords: Corporate Finance
JEL Classification: G32
Suggested Citation: Suggested Citation
Choi, Hak, The Kraus-Litzenberger Zero-Sum Trade-Off Theory (February 17, 2015). Available at SSRN: https://ssrn.com/abstract=2566590 or http://dx.doi.org/10.2139/ssrn.2566590
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