Abstract
PurposeThe paper aims to examine the practical importance of the finding of Mayers and Smith, that underinvestment is a problem when debt exposed to bankruptcy is part of the financial structure.Design/methodology/approachThe paper examines critically the assumptions underlying the Mayers and Smith paper.FindingsThe necessary assumption of deterministic arbitrage in the market for productive properties used by Mayers and Smith in their model is found to be unrealistic. Even if that assumption were valid, however, the result of Mayers and Smith establishes that raising exposed debt is a negative net present value project for the investor and hence that form of financing would not be found in practice.Practical implicationsThe existence of exposed debt does not explain the demand or commercial insurance.Originality/valueThe paper challenges the results of Mayers and Smith that have been used to examine the effect of debt on insurance demand for almost 20 years with mixed results.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
