About

Hayne E. Leland is a Professor of the Graduate School of Finance at UC Berkeley Haas School of Business. His expertise and research interests include structural modeling of credit risk, dynamic models of optimal leverage and agency costs, optimal investment strategies in the presence of transactions costs, and performance measurement beyond mean-variance analysis. He has held various positions at Berkeley since 1974, including Arno Rayner Professor of Finance and Management and Director of the Berkeley Program in Finance. Leland has contributed significantly to the field through his research on structural models of debt, credit crises, and corporate finance, and has been recognized with numerous awards such as the Stephen A. Ross Prize in Financial Economics and the Lifetime Achievement Award from the Financial Intermediation Research Society. His work has been influential in understanding market stability, asset management, and corporate financial strategies.

Research topics

• Econometrics
• Economics
• Financial economics
• Actuarial science
• Finance

Selected publications

• Beyond Mean-Variance: Risk and Performance Measurement in a Nonsymmetrical World

  SSRN Electronic Journal · 2021 · 32 citations

  1st authorCorresponding
  • Economics
  • Econometrics
  • Financial economics

  Most practitioners measure investment performance based on the CAPM, determining portfolio "alphas" or Sharpe Ratios.But the validity of this analysis rests on the validity of the CAPM, which assumes either normally distributed (and therefore symmetric) returns, or mean-variance preferences.Both assumptions are suspect: even if asset returns were normally distributed, the returns of options or dynamic strategies would not be.And investors distinguish upside from downside risks, implying skewness preference.This has led to the adoption of ad hoc criteria for measuring risk and performance, such as "Value at Risk" and the "Sortino Ratio."We consider a world in which the market portfolio (but not necessarily individual securities) has identically and independently distributed (i.i.d.) returns.In this world the market portfolio will be mean-variance inefficient and the CAPM alpha will mismeasure the value added by investment managers.The problem is particularly severe for portfolios using options or dynamic strategies.Strategies purchasing (writing) fairly-priced options will be falsely accorded inferior (superior) performance using the CAPM alpha measure.We show how a simple modification of the CAPM beta can lead to correct risk measurement for portfolios with arbitrary return distributions, and the resulting alphas of all fairly-priced options and/or dynamic strategies will be zero.We discuss extensions when the market portfolio is not assumed to be i.i.d.

  Publisher

• Bond Prices, Yield Spreads, and Optimal Capital Structure with Default Risk

  Finance · 2019-12-18 · 87 citations

  preprint1st authorCorresponding

  Cet article étudie la valeur de la dette en présence de risque de défaut dans une approche en temps continu. En considérant une dette avec des remboursements réguliers de nominal (à l’instar d’un fonds d’amortissement), nous sommes en mesure d’examiner des obligations à maturité quelconque tout en conservant un cadre d’analyse homogène par rapport au temps. Cela nous permet de prolonger les résultats analytiques de Leland (1994) à une classe plus large de structures de dette. Nous étudions la structure par terme des écarts de rendement et nous obtenons qu’une augmentation des taux d’intérêt diminue la prime des émissions de dette actuelles et peut aussi renverser la structure par terme. La duration est également affectée par le risque de défaut. La mesure traditionnelle de Macaulay surestime la duration effective qui peut même s’avérer négative pour les obligations à haut risque. Tandis que la dette à court terme n’exploite pas pleinement l’avantage fiscal comme le fait la dette à long terme, elle a davantage tendance à aligner les intérêts des créanciers et des actionnaires. Les coûts d’agence liés à la substitution d’actifs sont minimisés lorsque l’entreprise se finance avec de la dette à plus court terme. La structure optimale du capital dépend de la maturité de la dette. Le niveau d’endettement optimal est ainsi plus faible, et la valeur de l’entreprise est moindre, lorsque la dette à court terme est utilisée. L’écart de rendement au levier optimal augmente avec la maturité de la dette.

  PublisherDOI

• Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads

  World Scientific Publishing Company eBooks · 2019-03-01 · 206 citations

  book-chapter1st authorCorresponding

  This paper examines the optimal capital structure of a firm that can choose both the amount and maturity of its debt. Bankruptcy is determined endogenously rather than by the imposition of a positive net worth condition or by a cash flow constraint. The results extend Leland's [1994] closed- form results to a much richer class of possible debt structures and permit study of the optimal maturity of debt as well as the optimal amount of debt. The model predicts leverage, credit spreads, default rates, and writedowns which accord quite closely with historical averages. While short term debt does not exploit tax benefits as completely as long term debt, it is more likely to provide incentive compatibility between debt holders and equity holders. Short term debt reduces or eliminates asset substitution agency cost. The tax advantage of debt must be balanced against bankruptcy and agency cost in determining the optimal maturity of the capital structure. The model predicts differently shaped term structures of credit spreads for different levels of risk. These term structures are similar to those found empirically by Sarig and Warga [1989]. The model has important implications for bond portfolio management. In general, Macaulay duration dramatically overstates true duration of risky debt, which may be negative for junk bonds. Furthermore, the convexity of bond prices can become concavity.

  PublisherDOI

• Debt Maturity and the Leverage Ratcheting Effect

  Finance · 2019-12-18 · 13 citations

  articleOpen access1st authorCorresponding

  Admati, Demarzo, Hellwig, et Pfleiderer (ADHP, 2018) font remarquer que les modèles statiques d’endettement optimal supposent que les entreprises n’ont aucune dette à l’origine. Dans ce cas, le levier qui maximise la valeur de l’entreprise maximise aussi la richesse des actionnaires initiaux. Toutefois, à l’aide d’un simple modèle à deux périodes avec une dette zérocoupon et un défaut possible seulement à l’échéance, ADHP prouvent deux résultats surprenants : (i) quand il existe une dette antérieure, il ne sera jamais dans l’intérêt des actionnaires de réduire le levier, peu importe le niveau plus ou moins élevé de l’endettement actuel ; (ii) il sera dans l’intérêt des actionnaires de procéder à des rondes séquentielles de financement par dette supplémentaire, et ce jusqu’à ce que l’avantage fiscal de la dette soit épuisé : il s’agit de l’effet d’engrenage de l’endettement (EEE). Une conclusion qui suit immédiatement est que les modèles (statiques) à une ronde d’émission optimale de dette sans dette préexistante génèrent de mauvaises prévisions au sujet du levier optimal de l’entreprise. Nous examinons cette affirmation dans le cadre d’un modèle de dette différent, avec un refinancement à un taux proportionnel m et une maturité moyenne de 1/ m , tel que présenté par Leland (1994a). Nous montrons que lorsque la maturité moyenne de la dette est nettement plus longue que 5 ans, un montant considérable de dette sera en effet émis par la suite, même si l’émission cesse bien avant que les avantages fiscaux soient épuisés. Avec une maturité moyenne de 5 ans, il y a très peu de dette supplémentaire émise selon différents calibrages raisonnables. Avec une maturité moyenne de 3 ans, il n’y a pas d’émission de dette supplémentaire et il peut même être optimal pour l’entreprise de racheter de la dette, en contradiction avec le EEE. Nous expliquons pourquoi notre modèle génère ces différents résultats.

  PublisherOA PDFDOI

• Debt Maturity and the Leverage Ratcheting Effect

  SSRN Electronic Journal · 2019-01-01

  articleOpen access1st authorCorresponding
  PublisherDOI

• Corporate Debt Value, Bond Covenants, and Optimal Capital Structure

  World Scientific Publishing Company eBooks · 2019-03-01 · 109 citations

  book-chapter1st authorCorresponding
  PublisherDOI

• Theory of the Firm Facing Uncertain Demand: Reply

  American Economic Review · 2016-01-01 · 7 citations

  article1st authorCorresponding
  Publisher

• Options, option repricing in managerial compensation: Their effects on corporate investment risk

  Journal of Corporate Finance · 2013-11-12 · 37 citations

  article
  PublisherDOI

• Predictions of Default Probabilities in Structural Models of Debt

  2012-01-02 · 185 citations

  other1st authorCorresponding

  This chapter examines default probabilities the alternative "structural" models of risky corporate debt predict. It focus on default probabilities than credit spreads because they are not affected by additional market factors such as liquidity and tax differences, and prediction of the relative likelihood of default is often stated as the objective of bond ratings. The chapter distinguishes "exogenous default" from "endogenous default" models, compares these models' predictions of default probabilities, given common inputs and examines how well these models capture actual average default frequencies. The chapter finds the endogenous and exogenous default boundary models fit observed default Frequencies very well for horizons 5 years and longer, for both investment-grade and non-investment-grade ratings. It also concludes that shorter-term default frequencies tend to be underestimated, which in-turn suggests that a jump component should be included in asset value dynamics. Both types of structural models fit available default data equally well. But the models make different predictions about how default probabilities and recovery rates change with changes in debt maturity or asset volatility.

  PublisherDOI

• Structural Models and the Credit Crisis

  SSRN Electronic Journal · 2008-01-01 · 9 citations

  articleOpen access1st authorCorresponding
  PublisherDOI

Frequent coauthors

• Dirk Hackbarth

  Center for Economic and Policy Research

  13 shared

• Robert S. Goldstein

  University of Minnesota

  7 shared

• Steven M. H. Wallman

  6 shared

• Nengjiu Ju

  Shanghai Advanced Research Institute

  5 shared

• Yuk-Shee Chan

  4 shared

• David H. Pyle

  3 shared

• Christopher A. Hennessy

  3 shared

• Lemma W. Senbet

  3 shared

Education

• BA, PhD, Economics

  Harvard

Awards & honors

• Stephen A. Ross Prize in Financial Economics, 2008
• Lifetime Achievement Award, Financial Intermediation Researc…
• Honorary Doctorate (Doctor honoris causa), University of Par…
• Graham and Dodd Award, 1999
• Roger Murray Prize, Institute for Quantitative Research in F…