Bank's capital structure under non-diversifiable risk

Masaya Sakuragawa

doi:10.1007/s001990100195

Bank's capital structure under non-diversifiable risk

Research output: Contribution to journal › Article › peer-review

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 language	English
Pages (from-to)	29-45
Number of pages	17
Journal	Economic Theory
Volume	20
Issue number	1
DOIs	https://doi.org/10.1007/s001990100195
Publication status	Published - 2002 Aug 1
Externally published	Yes

Keywords

Asymmetric information
Capital structure
Financial intermediation

ASJC Scopus subject areas

Economics and Econometrics

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10.1007/s001990100195

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Bank's capital structure under non-diversifiable risk

Abstract

Keywords

ASJC Scopus subject areas

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