Posner: Are American CEOs Overpaid?

Posted on Tuesday, March 24, 2009 at 10:22 am

richard-posner.jpgRichard A. Posner: Since the cost of debt to a firm is fixed, but its revenues vary with price and output, the smaller the firm’s equity cushion relative to its total assets, the greater the risk of failure. The financial crisis was precipitated by the fact that the risks taken by financial firms were highly correlated and closely tied to housing prices (many of the assets held by banks and other financial institutions were in the form of securities backed by mortgages), so that when the housing bubble burst, much of the world’s financial industry was at or over the brink of insolvency. See here.