Brattle Principals Stewart Myers and James Read, along with Ohio State Professor Isil Erel, published an article on risk capital in the December 2015 issue of the Journal of Financial Economics.
In the article, the authors present a theory of risk capital and a general procedure for allocating costs of risk capital to contracts and lines of business in a financial firm. Risk capital is equity investment that backs obligations to creditors and other liability holders.
The authors’ theory yields an adjusted present value (APV) criterion for investment and contract decision making. In addition, the authors discuss implications for risk management and corporate finance.
The article, “A Theory of Risk Capital,” can be viewed here.View Article