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Seminarios académicos y conferencias

Michal Szkup, University of British Columbia

"Isolating Limited Liability as a Financial Friction"

Coautores: Jesse Perla y Carolin Pflueger

19 abril 2018 - 17:00 hrs.

Sala 209, Facultad de Ciencias Económicas y Administrativas UC

Abstract: We investigate how the presence of limited liabilities distorts firms’ investment decisions. We consider a simple model where firm owners are protected by limited liabilities and have to decide how much to invest as well as how to finance their investment. In contrast to earlier work, we find that, depending on the firm’s fundamentals, limited liabilities can lead to either under- or over-investment and that over-investment is more likely to occur. We then characterize conditions under which over-investment happens and provide intuition for why it occurs. We also investigate how our results depend on the type of claims issued by the firm and their relative priority. Finally, we provide empirical evidence consistent with the predictions of our model.