Optimal leverage for the utility maximizing firm

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Abstract

This paper investigates the behavior of a utility maximizing firm which chooses both its financial structure and its technique of production. Risk attitudes affect the production choice only indirectly. Risk aversion shifts the demand curve for credit. This demand shift affects the marginal interest rate faced by the firm, and through the interest rate there is an effect on production. Interaction of credit supply and demand schedules may segment the population into groups with very different responses to risk or credit market policy interventions.

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Cited by (2)

  • Managerial risk incentives and a firm's financing policy

    2019, Journal of Banking and Finance
    Citation Excerpt :

    More recently, Shue and Townsend (2017) use multi-year compensation plans to control for endogeneity and find a positive relation between option grants and leverage. The most relevant theoretical studies for this paper are Bardsley (1995); Berk et al. (2010), and Bhagat et al. (2011). Bardsley (1995) uses a two-period model and shows that there is a negative relation between risk aversion and optimal leverage.

  • Investment as an adaptation response to water scarcity

    2012, Water Policy Reform: Lessons in Sustainability from the Murray-Darling Basin
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I would like to thank an anonymous reviewer for very helpful comments.

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