Incentives and risk sharing in a stock market equilibrium

This paper aims to integrate the literature on-portfolio choice and security pricing with the literature on agency costs: and capital structure. It introduces the concept of a stock market equilibrium with rational, competitive price perceptions (RCPP). Using this equilibrium concept, the paper::finds that incentive considerations induce entrpeneurs:(i) to retain a larger share of their own firm and a smaller share of the equity,of other firms, and (ii) to make much more extensive use of debt than would be predicted by the standard general equilibrium model of:finance. These differences translate into higher interest rates and lower risk premia on the risky securities.