Bank's capital structure under non-diversifiable risk

Research output: Contribution to journalArticle

Abstract

The aim of this paper is to study the design of optimal capital structure of a "large" intermediary when the intermediary faces a non-diversifiable risk, within the standard costly-state-verification (CSV) model. I demonstrate that, under weaker conditions, a "large" intermediary realizes more efficient allocation by issuing both debt and equity than by issuing only debt. Unlike Diamond (1984) and Williamson (1986), the set of optimal contracts involves ex ante monitoring made by shareholders of the intermediary. Changes in parameters, such as the variance of the aggregate risk or the cost of monitoring, affect bankruptcy costs and the capital structure.

Original languageEnglish
Pages (from-to)29-45
Number of pages17
JournalEconomic Theory
Volume20
Issue number1
DOIs
Publication statusPublished - 2002 Aug
Externally publishedYes

Fingerprint

Capital structure
Bank capital
Intermediaries
Debt
Monitoring
Bankruptcy costs
Efficient allocation
Optimal capital structure
Equity
Optimal contract
Costs
Diamond
Costly state verification
Shareholders

Keywords

  • Asymmetric information
  • Capital structure
  • Financial intermediation

ASJC Scopus subject areas

  • Economics and Econometrics

Cite this

Bank's capital structure under non-diversifiable risk. / Sakuragawa, Masaya.

In: Economic Theory, Vol. 20, No. 1, 08.2002, p. 29-45.

Research output: Contribution to journalArticle

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