Title：Risk-taking with Financing Constraints

Speaker：Wei Cui, University College London

Time：2024/12/30 10:30-11:45AM

Venue：106 Zhonghui Building

Abstract

We analyze how financing constraints affect non-financial firms' risk-taking behaviors, shaped by leveraged returns and associated risks. We show that improved credit conditions can either promote or deter socially productive risk-taking. Following an interest rate cut, firms are less likely to take risks in a low-interest-rate environment but more inclined to do so in a high-interest-rate setting. This result leads to a non-monotonic, hump-shaped relationship between interest rates and the dispersion of firm returns at the aggregate level. When risk-taking enhances overall productivity, total factor productivity and the ``IS'' curve also display a hump shape. An optimal interest rate may exist, determined by the extent of return associations and credit limits. Financial regulation, targeting asset pledgeability and the interdependence of firms' risky projects, can thus shape the effectiveness of interest rate policy.