Robust Solvency, Identification, and Capital Structure under Ambiguity

Abstract

Capital-structure models typically evaluate financing choices under a trusted return distribution. This paper develops a robust-solvency framework for settings in which firms are uncertain about that distribution itself. Distributional ambiguity enters a Roy–Telser safety-first constraint rather than the objective function, tightening the set of admissible financing policies. Under the stated monotonicity and boundary conditions, greater ambiguity reduces feasible debt capacity wherever the robust solvency constraint binds. The empirical implementation maps the mechanism into a firm-level levered-return model and recovers an ambiguity-equivalent wedge from observed leverage. For observations with an interior Gaussian benchmark, the wedge is exactly the debt-weight target gap scaled by the ratio of debt cost to asset volatility, making its economic content and measurement boundary explicit. In a panel of United States-listed non-financial firms, the wedge-by-interior differential remains negative across all failure-probability calibrations and under System GMM. The implied interior effect is likewise negative under both fixed effects and System GMM, although imprecisely estimated. Asset volatility predicts lower subsequent leverage, without a significantly stronger association in the interior region. The results establish directional coherence with relative debt-capacity contraction while showing that the accounting-based inversion does not separately identify an ambiguity increment beyond conventional risk and target-gap variation.