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Title:Limited Risk-Sharing and Capital Structure PDF Logo
Authors:Schüwer, Ulrich
Issue Date:2010
Series/Report no.:Beiträge zur Jahrestagung des Vereins für Socialpolitik 2010: Ökonomie der Familie - Session: Capital Structure and Taxation G7-V2
Abstract: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.
Subjects:capital structure
security design
risk-sharing
segmented markets
JEL:G32
D52
G12
Document Type:Conference Paper
Appears in Collections:Jahrestagung des Vereins für Socialpolitik 2010: Ökonomie der Familie

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