Homemade Leverage

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Homemade leverage

Idea that as long as individuals borrow (or lend) on the same terms as the firm, they can duplicate the effects of corporate leverage on their own. Thus, if levered firms are priced too high, rational investors will simply borrow on personal accounts to buy shares in unlevered firms.

Homemade Leverage

Leverage resulting from borrowing or lending to oneself, particularly to enter into a riskless investment. An example of homemade leverage is borrowing from a personal account in order to buy U.S. Treasury securities. This concept is important to the Capital Asset Pricing Model and the Modigliani-Miller Theorem.

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