Optimal capital structure, ambiguity aversion, and leverage puzzles

We introduce ambiguity about the asset value dynamics of a firm into trade-off framework capital structure. characterize investors’ preferences by recursive multiple priors utility. show that equity holders’ aversion significantly reduces optimal leverage and debt capacity. In particular, holders with sufficiently strong perceive their to be “too valuable lose” upon bankruptcy therefore optimally choose zero forgo tax benefits avoid possible default. also distortion effect on choice is stronger (weaker) when firm’s markets are segmented (integrated).