Home \ Keywords \ bank

You are here


Debt Overhang and Capital Regulation

This March 2012 paper analyzes shareholder incentives to change the leverage of a firm that has borrowed substantially.

Because of such debt, shareholders typically don't have incentives to decrease leverage that would make the remaining debt safer. Government subsidies of debt contribute to resistance of such deleveraging. The analysis is relevant to the debate over bank capital regulation, where subsidies favor debt over equity.