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SUMMARY:Capital Structure and Hedging Demand with Incomplete Markets
DTSTART:20220114T140000
DTEND:20220114T153000
DTSTAMP:20260407T043859Z
UID:478c0ac9e495b28ed00328087895295ac9961930a0fac99c7aeec64b
CATEGORIES:Conferences - Seminars
DESCRIPTION:Gian Luca Clementi\, NYU Stern\nIn this paper we study the det
 erminants of the capital structure of firms as an equilibrium phenomenon i
 n financial markets. In particular\, we focus on  the role of \\textit{he
 dging demand}\, in economies where different investors may develop an appe
 tite for different types of securities depending on their risk properties.
   To this end we develop and study a general equilibrium model with produ
 ction and incomplete markets where households differ in their risk--sharin
 g needs. Value-maximizing firms take investors' hedging demand into consid
 eration in their capital structure choices\, possibly facing different inv
 estors for their bond and equity supply\, which affects their  choice of 
 leverage as well as their choice of technology.  We find that as the dema
 nd for hedging increases\, corporates grow in size\, to allow for greater 
 precautionary saving\, and issue more debt. How much more\, depends on the
  availability of competing risk-sharing instruments\, such as (government-
 -issued) risk--free debt and derivatives. When the capital structure is jo
 intly shaped by hedging demand and supply considerations\, the latter\, in
  the form of an asset--substitution problem\, we find that (i) agency is r
 elevant only when hedging demand is high and that (ii) larger investors' r
 isk--sharing needs lead to equilibria featuring greater aggregate risk. 
LOCATION:Zoom
STATUS:CONFIRMED
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