Bankruptcy, Warranties and the Firm's Capital Structure

Elie Appelbaum

International Economic Review, 1992, vol. 33, issue 2, 399-412

Abstract: This paper examines the role of capital structure as an instrument for shifting risk between real and financial markets. The author considers a firm whose contractual agreements involve both consumers and debtholders and shows that if consumers are risk averse, whereas equity and debtholders are risk neutral, the firm uses its capital structure to shift risk away from consumers. The optimal allocation of risk across real and financial markets leads the firm to be fully equity financed. Copyright 1992 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1992
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Working Paper: BANKRUPTCY, WARRANTIES AND THE FIRM'S CAPITAL STRUCTURE (1989)
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