Institutional Restrictions Homework Help

Institutional Restrictions

Yet another problem with the MM hypothesis is that institutional restrictions stand in the way of a smooth operation of the arbitrage process. Several institutional investors such as insurance companies, mutual funds, commercial banks and so on are not allowed to engage in personal leverage. Thus, switching the option from the unlevered to the levered firm may not apply to all investors and, to that extent, personal leverage is an imperfect substitute for corporate leverage.

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