Chinese ODI firms have a prominent tendency for debt financing, overreliance on which has accumulated a dangerously high level of credit risk. In this paper, based on a theoretical model of information economics, we investigate the micro - mechanism of firms＇ overreliance on debt when firms have private information about their project riskiness, by analyzing the equilibrium debt level that maximizes firms＇ expected profit and the socially equilibrium debt level that can maximize social welfare. It is found that the problem of debt overreliance is more severe if the financed projects are riskier, or if host country risk is higher, or if firms are imposed on a higher tax rate. Our findings are helpful to put forward useful suggestions from this respect for our financial supporting policy system to promote Chinese ＂Belt and Road＂ firms to better conduct international investments.
This article discusses the optimal leverage ratio and capital requirements when asymmetric information exists between the bank and the regulator. We show that the optimal requirements take different forms in the short and long run. In either case, imposing the risk-weighted capital requirement without considering the incentives of the bank to misreport its risk profile is never optimal by itself. In the long run, the optimal requirements take the form of a leverage ratio requirement on top of the risk-weighted capital requirement. The add-on leverage ratio requirement, which serves as a compensation for the limited supervisory power of the regulators, should be set such that the risk-taking behavior of the bank is unchanged from the situation in which the regulator uses the risk-weighted capital requirement alone, and the misreporting incentive of the bank is eliminated by the add-on leverage ratio requirement.