Leverage and the price volatility of equity shares in equilibrium

Eckwert B, Drees B (2000)
The Quarterly Review of Economics and Finance 40(2): 155-167.

Zeitschriftenaufsatz | Veröffentlicht| Englisch
 
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Autor/in
Eckwert, BernhardUniBi; Drees, Burkhard
Abstract / Bemerkung
The traditional valuation formulas for corporate debt, which are 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 payoffs of the existing assets, and the pricing of corporate debt and shares of levered firms becomes a simultaneous valuation problem. This paper characterizes the relationship between 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. While, in the absence of bankruptcy, higher leverage always implies riskier equity, it does not necessarily mean more volatile equity prices. In fact, the link between leverage and equity price volatility depends in a particular way on investors’ preferences towards risk.
Stichworte
Goodwill; Value of Firms; Capital and Ownership Structure; Bond Interest Rates; Trading Volume; Asset Pricing; Financial Risk and Risk Management; Financing Policy
Erscheinungsjahr
2000
Zeitschriftentitel
The Quarterly Review of Economics and Finance
Band
40
Ausgabe
2
Seite(n)
155-167
ISSN
1062-9769
Page URI
https://pub.uni-bielefeld.de/record/2687265

Zitieren

Eckwert B, Drees B. Leverage and the price volatility of equity shares in equilibrium. The Quarterly Review of Economics and Finance. 2000;40(2):155-167.
Eckwert, B., & Drees, B. (2000). Leverage and the price volatility of equity shares in equilibrium. The Quarterly Review of Economics and Finance, 40(2), 155-167. doi:10.1016/S1062-9769(99)00058-7
Eckwert, B., and Drees, B. (2000). Leverage and the price volatility of equity shares in equilibrium. The Quarterly Review of Economics and Finance 40, 155-167.
Eckwert, B., & Drees, B., 2000. Leverage and the price volatility of equity shares in equilibrium. The Quarterly Review of Economics and Finance, 40(2), p 155-167.
B. Eckwert and B. Drees, “Leverage and the price volatility of equity shares in equilibrium”, The Quarterly Review of Economics and Finance, vol. 40, 2000, pp. 155-167.
Eckwert, B., Drees, B.: Leverage and the price volatility of equity shares in equilibrium. The Quarterly Review of Economics and Finance. 40, 155-167 (2000).
Eckwert, Bernhard, and Drees, Burkhard. “Leverage and the price volatility of equity shares in equilibrium”. The Quarterly Review of Economics and Finance 40.2 (2000): 155-167.

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