Leverage, Moral Hazard, and Liquidity

Journal Article (Journal Article)

Financial firms raise short-term debt to finance asset purchases; this induces risk shifting when economic conditions worsen and limits their ability to roll over debt. Constrained firms de-lever by selling assets to lower-leverage firms. In turn, asset-market liquidity depends on the system-wide distribution of leverage, which is itself endogenous to future economic prospects. Good economic prospects yield cheaper short-term debt, inducing entry of higher-leverage firms. Consequently, adverse asset shocks in good times lead to greater de-leveraging and sudden drying up of market and funding liquidity. © 2011 the American Finance Association.

Full Text

Duke Authors

Cited Authors

  • Acharya, VV; Viswanathan, S

Published Date

  • February 1, 2011

Published In

Volume / Issue

  • 66 / 1

Start / End Page

  • 99 - 138

Electronic International Standard Serial Number (EISSN)

  • 1540-6261

International Standard Serial Number (ISSN)

  • 0022-1082

Digital Object Identifier (DOI)

  • 10.1111/j.1540-6261.2010.01627.x

Citation Source

  • Scopus