DeAngelo, Harry; Stulz, Rene M. - Charles A. Dice Center for Research in Financial … - 2013
Liquidity production is a central role of banks. When there is a market premium for the production of (socially valuable) liquid financial claims and no other departures from the Modigliani and Miller (1958, MM) assumptions, we show that high leverage is optimal for banks. In this model, high...