Optimal leverage for the utility maximizing firm

Abstract

This paper investigates the behavior of a utility maximizing firm which chooses both its financial structure and its technique of production. Risk attitudes affect the production choice only indirectly. Risk aversion shifts the demand curve for credit. This demand shift affects the marginal interest rate faced by the firm, and through the interest rate there is an effect on production. Interaction of credit supply and demand schedules may segment the population into groups with very different responses to risk or credit market policy interventions. © 1995.