Optimum Corporate Leverage with Risky Debt: A Demand Approach
Traditional models of corporate interior optimum leverage rely on institutional schemes such as taxes, bankruptcy,and agency costs. Theories of leverage indifference in the presence of risky debt depend on various features of perfect and complete markets and on the assumption that all investors hold a uniform portfolio. In the model developed here, corporate interior optimum leverage is obtained as a result of a fundamental risk-return trade-off for investors who hold nonuniform portfolios of risky equity and debt claims in the absence of market mechanisms, forcing leverage indifference. The dynamic optimization solution accommodates bankruptcy costs and specialized institutional factors but does not rely on their presence.
Year of publication: |
1989
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Authors: | Choi, Jongmoo Jay ; Fabozzi, Frank J ; Yaari, Uzi |
Published in: |
Journal of Financial Research. - Southern Finance Association - SFA, ISSN 0270-2592. - Vol. 12.1989, 2, p. 129-42
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Publisher: |
Southern Finance Association - SFA Southwestern Finance Association - SWFA |
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