Optimal scope and financial structure of the firm

Chapter I presents a valuation model which determines the scope of the firm and the optimal financial structure. The model belongs to a class of structural models of credit risk. The model determines whether the assets should be kept together in one multi-asset firm or separated into several single-asset firms. At the same time, the model determines the optimal leverage for each specific firm. The outcome of the model is driven by two main effects: the coinsurance and the financial flexibility. Keeping assets together or separate affects the volatility of the assets in the firm (coinsurance effect). Same decision determines the number of firms and the number of opportunities to choose the optimal leverage (financial flexibility effect).; Chapter II compares the entrepreneurial firm and the securitization trust. The main difference between the entrepreneurial firm and the securitization trust is in the bankruptcy procedure governing each of the entities and the role of equityholders. Equityholders in the entrepreneurial firm default on the debt payments at the point which optimizes the value of the equity. The bankruptcy costs for the firm are high. Securitization removes control from the equityholders and the bankruptcy boundary is set at the predetermined level. After the value of the securitized assets hits this lower boundary, the securitization trust rapidly prepays its debt. The costs related to the prepayment for the securitization trust are low. The model determines the optimal choice of governance structure.; Chapter III develops a valuation model for the securitization entity which issues several classes of securities. The entity issues senior debt, junior debt, and equity. Senior debt notes are secured. They are rapidly prepaid if the value of the assets reaches the prepayment boundary. After the partial prepayment, the entity has only junior debt and equity outstanding. The junior debt notes are unsecured. In the case of the final default, the junior debt is repaid from the remaining liquidation value. Equity notes represent the residual class of issued securities. The model determines the optimal combination of senior debt, junior debt and equity which maximizes the total value of the securitization entity.