Debt collateralization, capital structure, and maximal leverage
Name
199_2019_1222_ReferencePDF.pdf
Size
214.06 KB
Format
Adobe PDF
Checksum (MD5)
51cb1546cc5c31d41eab7ddc7f2be1f4
Author(s)
Gong, Feixue
Phelan, Gregory
Date Issued
August 19, 2019
Publisher
Springer Berlin Heidelberg
Version
Author's final manuscript
Abstract
Abstract
We study the effects of allowing risky debt to be used as collateral in a general equilibrium model with heterogeneous agents and collateralized financial contracts. With debt collateralization, investors switch to using exclusively high-leverage contracts for every investment they choose (issuing risky debt when possible). High-leverage positions maximize the ability of contracts to serve as collateral, expanding the set of state contingencies created from collateralized debt. We provide conditions under which debt collateralization will increase the price of the underlying asset. Our results also apply to variations in capital structure since many capital structures implicitly provide the ability to use debt contracts as collateral.
MIT Department
Massachusetts Institute of Technology. Department of Economics
Terms of Use
Article is made available in accordance with the publisher's policy and may be subject to US copyright law. Please refer to the publisher's site for terms of use.
Persistent DSpace Link
DOI of Published Version
https://doi.org/10.1007/s00199-019-01222-7
