Risk-Taking Behavior with Limited Liability and Risk Aversion
The authors of this paper consider the problem of a risk-averse firm with limited liability. The firm has to select the size of its investment in a risky project. We show that the optimal exposure to risk of the limited liability firm is always larger than under full liability. Moreover, there exists a positive lower bound on the value of the firm below which the firm will "bet for resurrection," i.e. it will invest the largest positive amount in the risky project. We also consider the standard portfolio problem with more than one risky asset. We show that limited liability may induce the firm to specialize in no Mean-Variance efficient assets. This paper was presented at the Financial Institutions Center's May 1996 conference on "
|Date of creation:||May 1996|
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- Golbe, Devra L., 1988. "Risk-taking by firms near bankruptcy," Economics Letters, Elsevier, vol. 28(1), pages 75-79.
- Dionne, G. & Eeckhoudt, L., 1990.
"Increases In Risk And Linear Payoffs,"
Cahiers de recherche
9019, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
- Rochet, Jean-Charles, 1992. "Capital requirements and the behaviour of commercial banks," European Economic Review, Elsevier, vol. 36(5), pages 1137-1170, June.
- Gollier Christian, 1995. "The Comparative Statics of Changes in Risk Revisited," Journal of Economic Theory, Elsevier, vol. 66(2), pages 522-535, August.
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