Limited Risk-Sharing and Capital Structure

Konferenzbeitrag

This paper develops a model where firms' equilibrium capital structures depend on firms' risk characteristics and investors' aggregate risk appetite. I assume that the law of one price fails because security markets are incomplete and risk-sharing through short-selling or borrowing is limited. Investors have heterogeneous risk preferences. Thus, firms can create value through the issuance of debt and equity securities that optimally meet investor demand. I show that, in equilibrium, firms with high market risk have a lower debt ratio than firms with low market risk. Empirical evidence that completes this paper supports the relevance of this theoretical result.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Beiträge zur Jahrestagung des Vereins für Socialpolitik 2010: Ökonomie der Familie - Session: Capital Structure and Taxation ; No. G7-V2

Classification and Topics

• Classification: Wirtschaft ; Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill ; Incomplete Markets ; Asset Pricing; Trading Volume; Bond Interest Rates
• Subject: capital structure ; security design ; risk-sharing ; segmented markets

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Schüwer, Ulrich
• Event: Veröffentlichung
• (who): Verein für Socialpolitik
• (where): Frankfurt a. M.
• (when): 2010

Further information

• Handle: http://hdl.handle.net/10419/37294
• Last update: 10.03.2025, 11:43 AM CET