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Equilibrium corporate finance and intermediation

Author

Listed:
  • Bisin, Alberto;
  • Gottardi, Piero;
  • Ruta, Guido

Abstract

This paper analyzes a class of competitive economies with production, incomplete financial markets, and agency frictions. Firms take their production, financing, and contractual decisions so as to maximize their value under rational conjectures. We show that competitive equilibria exist and that shareholders always unanimously support firms' choices. In addition, equilibrium allocations have well-defined welfare properties: they are constrained efficient when information is symmetric, or when agency frictions satisfy certain specific conditions. Furthermore, equilibria may display specialization on the part of identical firms and, when equilibria are constrained inefficient, may exhibit excessive aggregate risk. Financial decisions of the corporate sector are determined at equilibrium and depend not only on the nature of financial frictions but also on the consumers' demand for risk. Financial intermediation and short sales are naturally accounted for at equilibrium.

Suggested Citation

  • Bisin, Alberto; & Gottardi, Piero; & Ruta, Guido, 2014. "Equilibrium corporate finance and intermediation," Economics Working Papers ECO2014/09, European University Institute.
  • Handle: RePEc:eui:euiwps:eco2014/09
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    References listed on IDEAS

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    Cited by:

    1. Piero Gottardi & Douglas Gale, 2017. "Equilibrium Theory of Banks' Capital Structure," 2017 Meeting Papers 380, Society for Economic Dynamics.

    More about this item

    Keywords

    Capital structure; Competitive equilibria; Incomplete markets; Asymmetric information;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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