S. Chan, J. Erickson and K. Wang, “Real Estate Investment Trusts: Structure, Performance, and Investment Opportunities,” Oxford University Press, New York, 2003.
AUTHORS: John F. McDonald
ABSTRACT: This paper shows that, if firms borrow at an interest rate that is greater than the rate at which they can lend, the value of a firm declines with the amount borrowed. The model assumes the possibility that a firm may go bankrupt, which introduces the need for financial intermediation. A modified version of the homemade lev-erage examples introduced by Modigliani and Miller  is used to introduce the concept. A state-preference model is used for a more formal proof.