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Property Rights, Risk and Leverage

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Author Info
Graff, Richard A. (Electrum Partners L.L.C.)
Kairys, Jr. Joseph P. () (Department of Economics, School of Economics and Commercial Law, Göteborg University)
Abstract

Risk matters when corporate debt has a positive probability of default. Lenders have traditionally used covenants to protect their property rights because the financing and operating decisions of firms can reduce the value of the firm’s outstanding debt. We examine the use of captive finance subsidiaries and special purposed entities (SPEs) to partition default risk within the firm. A more complex arrangement of property rights within the firm allows the parent firm to retain operating flexibility while offering lenders better protection. We conclude that capital structure is a relevant decision variable for corporate managers because firms are able to obtain leveraged finance at a lower cost when risk is partitioned using separate legal structures within the firm.

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File URL: http://hdl.handle.net/2077/2711
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Publisher Info
Paper provided by Göteborg University, Department of Economics in its series Working Papers in Economics with number 183.

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Length: 44 pages
Date of creation: 31 Oct 2005
Date of revision:
Handle: RePEc:hhs:gunwpe:0183

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Postal: Department of Economics, School of Business, Economics and Law, Göteborg University Box 640, SE 405 30 GÖTEBORG, Sweden
Phone: 031-773 10 00
Web page: http://www.handels.gu.se/econ/
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Related research
Keywords: capital structure; captive finance companies; structured finance;

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Find related papers by JEL classification:
D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure

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