A model of leverage based on risk sharing
AbstractThis paper offers a new approach, based on risk sharing, to endogenize the leverage of financial intermediaries. It endogenizes debt as the optimal contract for external financing, thereby capturing two features of leverage: debt serves to boost the return on equity, and equity provides “safety net” for debt. The paper derives a novel prediction that when the asset-side risk rises, the leverage ratio is reduced, but the profit margin of leveraging is actually widened.
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Bibliographic InfoArticle provided by Elsevier in its journal Economics Letters.
Volume (Year): 119 (2013)
Issue (Month): 1 ()
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Web page: http://www.elsevier.com/locate/ecolet
Risk sharing; Leverage; Financial intermediaries;
Find related papers by JEL classification:
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
- G20 - Financial Economics - - Financial Institutions and Services - - - General
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
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