Finance Seminar - Tobias Berg (Frankfurt School of Finance & Management)

Abstract: This paper examines the implications of leverage for corporate risk taking in a dynamic N-period model. In each period, there is an identical, standard riskshifting problem. Leverage creates two inefficiencies. First, we confirm the standard intuition by which high leverage leads firms to take risk. Second, medium leverageleads firms to avert risk. By averting risk, medium leverage firms can preserve the option to issue safe and hence, cheap debt in the future. Our model predicts a U-shaped relationship between firm risk and leverage, which is present in the data, both in the U.S. and in Europe.

Paper

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Location: B20 Jevons Lecture Theatre, Drayton House or Zoom