Complex Organizations, Leverage, and Interest Rates
Working Paper Author/Authors
Key Finding
In sponsor-backed organizations, falling interest rates can shift borrowing toward affiliated units rather than parent firms, increasing leverage and default risk through internal governance structures
Abstract
Our trade-off model studies optimal leverage responses to interest rates within a sponsor–backed unit structure. Such structures are common in private equity, parent–subsidiary, and securitization arrangements, where a sponsor provides contingent support to an affiliated unit. When interest rates fall below a cutoff, the sponsor chooses zero leverage while the backed unit increases borrowing. Unlike stand-alone firms, whose leverage declines as rates fall, backed units generate higher expected default costs in low-interest-rate environments. Complex organizations can thus reallocate leverage toward supported entities, revealing a new channel shaping the transmission of monetary conditions to leverage and credit risk.
© Giovanna Nicodano, Luca Regis, 2026
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