Intercorporate Guarantees, Leverage and Taxes

Taxes, Leverage, and Stimuli of Investment under Uncertainty

This paper examines the effect of leverage on the effectiveness of a self-financed taxsubsidy program offered by a government in stimulating a firm’s investment. We show that the firm, be it levered or unlevered, has an incentive to hasten its investment because of the agency conflicts arising from the commitment made by the government on the terms of the tax-subsidy program. We further show th...

Speculation and Leverage

Speculative episodes typically involve leverage. For example, the well known tulipmania episode was accompanied by the introduction of foward contracts which allowed speculators to take leveraged positions in tulip bulbs. More recently, the Great Crash of 1929 was exacerbated by leveraged trusts which used leverage to buy stocks. These leveraged trusts could in turn be bought on margin which al...

Learning, Leverage and Stability1

Rehypothecation and Intermediary Leverage

This paper provides a theory of endogenous leverage through rehypothecation in collateralized intermediation. Overcollateralization with an rehypothecation option arises as an optimal contract form between broker dealers and their clients to mitigate adverse selection on collateral quality. Such contract prevents the broker dealers from taking advantage of private information on collateral qual...

Skewness and Leverage