FRIC/Finance Seminar with Tobias Berg, Frankfurt School of Finance & Management

The Department of Finance is proud to announce the upcoming seminar with Tobias Berg, Frankfurt School of Finance & Management.

Tobias Berg will present:

Leverage, Risk-Taking, and the Medium-Leverage Safety Trap

ABSTRACT: This paper examines the implications of leverage for corporate risk taking in a dynamic N-period model. In each period, there is an identical, standard risk shifting problem. Leverage creates two inefficiencies. First, we confirm the standard intuition by which high leverage leads firms to take risk. Second, medium leverage leads firms to avert risk. By averting risk, medium leverage firms can preserve the option to issue safe and hence, cheap debt in the future. The preference for safe projects traps firms in what we call a medium-leverage safety trap. Our model predicts a U-shaped relationship between firm risk and leverage, which is present in the data, both in the U.S. and in Europe.

Location:

Solbjerg Plads 3
2000 Frederiksberg
Room: SPs05