Optimal Financial Structure and Asset Prices

Johan Hombert
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Johan Hombert: GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique

Working Papers from HAL

Abstract: I study the welfare properties of competitive equilibria in an economy with financial frictions. In the model, entrepreneurs raise funds to set up a firm, then they exert effort, and finally they trade assets. Private financial contracts do not internalize their impact on asset prices. On the one hand, lower prices depress the liquidation value - the collateral effect. On the other hand, lower prices boost entrepreneurs' incentives to achieve good performance - the incentive effect. I show that the latter effect outweighs the former, implying that a decrease in asset prices improves welfare.

Keywords: Capital structure; Constrained efficiency; Credit market imperfections; Fire sales (search for similar items in EconPapers)
Date: 2012-12-04
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Published in 2012

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Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-00760750

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