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| Author: | Drees, B. Eckwert, B. |
| Title: | Leverage and the price volatility of equity shares in equilibrium |
| Journal: | Quarterly Review of Economics and Finance
2000 : SUMMER, VOL. 40:2, p. 155-167 |
| Index terms: | Companies Finance Debt Prices Volatility Models |
| Language: | eng |
| Abstract: | The traditional valuation formulas for corporate debt, derived in a complete market setting and are based on the no-arbitrage principle, imply that equity prices become more volatile as leverage increases. If the asset structure is incomplete, the presence of corporate debt affects the linear subspace spanned by the pay-offs of the existing assets, and the pricing of corporate debt and shares of levered firms becomes simultaneous valuation problem. This paper characterizes the relationship btw. the price of corporate debt and the share price of a levered firm in an equilibrium framework where corporate debt is a non-redundant asset. |
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