Risk, uncertainty, and leverage

Macroeconomic Uncertainty and Firm Leverage

This paper investigates the link between the optimal level of nonfinancial firms’ leverage and macroeconomic uncertainty. We develop a structural model of a firm’s value maximization problem that predicts that as macroeconomic uncertainty increases the firm will decrease its optimal level of borrowing. We test this proposition using a panel of non–financial US firms drawn from the COMPUSTAT qua...

Taxes, Leverage, and Stimuli of Investment under Uncertainty

This paper examines the effect of leverage on the effectiveness of a self-financed taxsubsidy program offered by a government in stimulating a firm’s investment. We show that the firm, be it levered or unlevered, has an incentive to hasten its investment because of the agency conflicts arising from the commitment made by the government on the terms of the tax-subsidy program. We further show th...

Risk Parity and the Limits of Leverage

Risk, Leverage, and Regulation of Financial Intermediaries

This paper presents a model on the leverage of …nancial intermediaries, where debt are held by risk averse agents and equity by the risk neutral. The paper shows that in an unregulated competitive market, …nancial intermediaries choose to be leveraged over the social best level. This is because the leverage of one intermediary imposes a negative externality upon others by reducing their pro…t m...

Firm Risk and Leverage-Based Business Cycles

I characterize cyclical fluctuations in the cross-sectional dispersion of firm-level productivity. Using the micro-estimated dispersion, or “risk,” stochastic process as an input to a baseline DSGE financial accelerator model, I assess how well the model reproduces cyclical movements in both real and financial conditions of the economy. In the model, risk shocks calibrated to micro data lead to...