The Firm Under Uncertainty: Capital Structure and Background Risk

摘要: This paper examines the interplay between real and financial decisions of competitive firm under output price uncertainty. The faces additional sources uncertainty that are aggregated into a background risk. We show always chooses its optimal debt-equity ratio to minimize weighted average cost capital, irrespective risk attitude incidence underlying further firm's input mix depends on ratio, thereby rendering interdependence firm. When is either additive or multiplicative, we provide reasonable restrictions preferences so as ensure adversely affected upon introduction