Leverage and Risk Taking

Santiago Moreno-BROMBERG and Guillaume Roger
Additional contact information
Santiago Moreno-BROMBERG: University of Zurich - Department of Banking and Finance

No 15-64, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We study a dynamic contracting problem in which size is relevant. The agent may take on excessive risk to enhance short-term gains, which exposes the principal to large, infrequent losses. To preserve incentive compatibility, the optimal contract uses size as an instrument; there is downsizing on the equilibrium path. The contract may be implemented using the full array of financial securities or as a regulation contract with a leverage ratio. We show that holding equity is essential to curb risk taking. Firms that are less prone to risk taking can afford a higher leverage.

Keywords: asymmetric information; dynamic contracts; moral hazard; risk taking (search for similar items in EconPapers)
Pages: 56 pages
Date: 2015-12
New Economics Papers: this item is included in nep-cta, nep-mic and nep-rmg
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://ssrn.com/abstract=2727784 (application/pdf)

Related works:
Working Paper: Leverage and Risk Taking (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1564

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().