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The Optimality Of Debt Versus Outside Equity
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Book Synopsis The Optimality of Debt Versus Outside Equity by : Zsuzsanna Fluck
Download or read book The Optimality of Debt Versus Outside Equity written by Zsuzsanna Fluck and published by . This book was released on 2008 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents a theory of outside equity based on the control rights and the maturity design of equity. We show that outside equity is a tacit agreement between investors and management supported by equityholders right to dismiss management regardless of performance and by the lack of a prespecified expiration date on equity. Furthermore, as a tacit agreement outside equity is sustainable despite management s potential for manipulating or diverting the cash flows and regardless of how costly it is for equityholders to establish a case against managerial wrongdoing. We establish that the only outside equity hat investors are willing to hold in equilibrium is outside equity with unlimited life, the very outside equity that corporations issues. Consistent with empirical evidence, this model predicts that debt-equity ratios will be higher in industries where cash flow variability is low relative to industries where cash flow variability is high. Furthermore, our theory implies that investors practice maturity- matching: they match the maturity of the optimal debt contract with the life of the physical assets and the maturity of the equity contract with the life of the company s real options.
Book Synopsis Optimal Financial Contracting by : Zsuzsanna Fluck
Download or read book Optimal Financial Contracting written by Zsuzsanna Fluck and published by . This book was released on 1998 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents a theory of outside equity based on the control rights and the maturity design of equity. We show that outside equity is a tacit agreement between investors and management supported by equityholders' right to dismiss management regardless of performance and by the lack of a prespecified expiration date on equity. As a tacit agreement outside equity is sustainable despite management's potential for manipulating the cash flows and regardless of how costly it is for equity holders to establish a case against managerial wrongdoing. We establish that the only outside equity that investors are willing to hold in equilibrium is that with unlimited life, the very outside equity that corporations issue. Consistent with empirical evidence, this model predicts that debt-equity ratios are higher (lower) in industries withlow (high) cash flow variability.
Book Synopsis Optimal Financing Contracting by : Zsuzsanna Fluck
Download or read book Optimal Financing Contracting written by Zsuzsanna Fluck and published by . This book was released on 1998 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis A Theory of Outside Equity by : Spiros P. Bougheas
Download or read book A Theory of Outside Equity written by Spiros P. Bougheas and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: In the financial economics literature debt contracts provide efficient solutions for addressing managerial moral hazard problems. We analyze a model with multiple projects where the manager obtains private information about their quality after the contract with investors is agreed. The likelihood of success of each project depends on both its quality and the level of effort exerted on it by the manager. We find that, depending on the distribution of the quality shock, the optimal financial contract can be either debt or equity.
Book Synopsis Control Rights and Maturity by : Zsuzsanna Fluck
Download or read book Control Rights and Maturity written by Zsuzsanna Fluck and published by . This book was released on 2000 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates the design of the control rights and the maturity of securities when management has the ability to divert or manipulate the cash flows, and when it is prohibitively costly for a third party, such as a court, to verify or prove any managerial wrongdoing. By endogenizing claim structures, control rights and maturity, I derive a diverse set of optimal contracts. Debt with a maturity shorter than the life of the assets is sustainable when investors have the contingent right to liquidate the firm?s assets. Longer-term debt can be sustained by investors? right to dismiss management and take over the firm as a going-concern in the event of a default. Investors are willing to hold indefinite life equity if they are granted either the unconditional right to liquidate firm?s assets or the unconditional right to dismiss management. Finally, convertible debt can be sustained by investors? right to dismiss management and take over the firm in the event of a default and by the holder?s option to convert their debt contract to an equity contract prior to its expiration date. Consistent with empirical evidence, this model predicts that small entrepreneurial firms use short-term bank loans, convertible debt, or outside equity at their initial financing stage; as they show evidence of higher profitability, they can secure longer-term debt financing.
Book Synopsis The Debt/equity Choice by : Ronald W. Masulis
Download or read book The Debt/equity Choice written by Ronald W. Masulis and published by . This book was released on 1988 with total page 168 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Optimal Long-Term Financial Contracting by : Peter M. DeMarzo
Download or read book Optimal Long-Term Financial Contracting written by Peter M. DeMarzo and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We develop an agency model of financial contracting. We derive long-term debt, a line of credit, and equity as optimal securities, capturing the debt coupon and maturity; the interest rate and limits on the credit line; inside versus outside equity; dividend policy; and capital structure dynamics. The optimal debt-equity ratio is history dependent, but debt and credit line terms are independent of the amount financed and, in some cases, the severity of the agency problem. In our model, the agent can divert cash flows; we also consider settings in which the agent undertakes hidden effort, or can control cash flow risk.
Book Synopsis Economic Analysis of the Law by : Donald A. Wittman
Download or read book Economic Analysis of the Law written by Donald A. Wittman and published by John Wiley & Sons. This book was released on 2008-04-15 with total page 352 pages. Available in PDF, EPUB and Kindle. Book excerpt: Providing students with a solid grounding in the economic analysis of the law, this reader brings together edited versions of diverse and challenging journal articles into a unified collection. Chosen to provoke thought and discussion, these carefully streamlined articles apply economic theories to many aspects of the law, from intellectual property, corporate finance, and contracts to property rights, family law, and criminal law. Provides real-life examples and implications of economic theory. Creates a unified vision of the law, showing the interconnections between the various fields. Covers a broad range of topics, from intellectual property and corporate finance to family and criminal law. Encourages intuitive understanding and applications of the economic principles, due to reduced mathematical content.
Book Synopsis Handbook of Financial Intermediation and Banking by : Anjan V. Thakor
Download or read book Handbook of Financial Intermediation and Banking written by Anjan V. Thakor and published by Elsevier. This book was released on 2008-07-07 with total page 605 pages. Available in PDF, EPUB and Kindle. Book excerpt: The growth of financial intermediation research has yielded a host of questions that have pushed "design" issues to the fore even as the boundary between financial intermediation and corporate finance has blurred. This volume presents review articles on six major topics that are connected by information-theoretic tools and characterized by valuable perspectives and important questions for future research. Touching upon a wide range of issues pertaining to the designs of securities, institutions, trading mechanisms and markets, industry structure, and regulation, this volume will encourage bold new efforts to shape financial intermediaries in the future. - Original review articles offer valuable perspectives on research issues appearing in top journals - Twenty articles are grouped by six major topics, together defining the leading research edge of financial intermediation - Corporate finance researchers will find affinities in the tools, methods, and conclusions featured in these articles
Book Synopsis The Theory of the Firm by : Nicolai J. Foss
Download or read book The Theory of the Firm written by Nicolai J. Foss and published by Taylor & Francis. This book was released on 2000 with total page 488 pages. Available in PDF, EPUB and Kindle. Book excerpt: Includes over 60 classic papers, these volumes collect together contributions on the theory of the firm, beginning with Ronald Coase's classic work of 1937 and ending with important papers published as late as 1998.
Book Synopsis Contingent Control Rights and Asset Substitution by : Zsuzsanna Fluck
Download or read book Contingent Control Rights and Asset Substitution written by Zsuzsanna Fluck and published by . This book was released on 1999 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis A Theory of the Firm by : Michael C. Jensen
Download or read book A Theory of the Firm written by Michael C. Jensen and published by Harvard University Press. This book was released on 2003-09-30 with total page 342 pages. Available in PDF, EPUB and Kindle. Book excerpt: This collection examines the forces, both external and internal, that lead corporations to behave efficiently and to create wealth. Corporations vest control rights in shareholders, the author argues, because they are the constituency that bear business risk and therefore have the appropriate incentives to maximize corporate value. Assigning control to any other group would be tantamount to allowing that group to play poker with someone else's money, and would create inefficiencies. The implicit denial of this proposition is the fallacy of the so-called stakeholder theory of the corporation, which argues that corporations should be run in the interests of all stakeholders. This theory offers no account of how conflicts between different stakeholders are to be resolved, and gives managers no principle on which to base decisions, except to follow their own preferences. In practice, shareholders delegate their control rights to a board of directors, who hire, fire, and set the compensation of the chief officers of the firm. However, because agents have different incentives than the principals they represent, they can destroy corporate value unless closely monitored. This happened in the 1960s and led to hostile takeovers in the market for corporate control in the 1970s and 1980s. The author argues that the takeover movement generated increases in corporate efficiency that exceeded $1.5 trillion and helped to lay the foundation for the great economic boom of the 1990s.
Book Synopsis Corporate Governance and Corporate Finance by : Ruud A.I. van Frederikslust
Download or read book Corporate Governance and Corporate Finance written by Ruud A.I. van Frederikslust and published by Routledge. This book was released on 2007-12-18 with total page 780 pages. Available in PDF, EPUB and Kindle. Book excerpt: Pt. 1. Alternative perspectives on corporate governance systems -- pt. 2. Equity ownership structure and control -- pt. 3. Corporate governance, underperformance and management turnover -- pt. 4. Directors' remuneration -- pt. 5. Governance, performance and financial strategy -- pt. 6. On takeover as disciplinary mechanism.
Book Synopsis Handbook of the Economics of Finance by : George M. Constantinides
Download or read book Handbook of the Economics of Finance written by George M. Constantinides and published by Elsevier. This book was released on 2003-11-04 with total page 654 pages. Available in PDF, EPUB and Kindle. Book excerpt: Volume 1A covers corporate finance: how businesses allocate capital - the capital budgeting decision - and how they obtain capital - the financing decision. Though managers play no independent role in the work of Miller and Modigliani, major contributions in finance since then have shown that managers maximize their own objectives. To understand the firm's decisions, it is therefore necessary to understand the forces that lead managers to maximize the wealth of shareholders.
Book Synopsis The Impact of Incomplete Contracts on Economics by : Philippe Aghion
Download or read book The Impact of Incomplete Contracts on Economics written by Philippe Aghion and published by Oxford University Press. This book was released on 2015-12-22 with total page 224 pages. Available in PDF, EPUB and Kindle. Book excerpt: The 1986 article by Sanford J. Grossman and Oliver D. Hart titled "A Theory of Vertical and Lateral Integration" has provided a framework for understanding how firm boundaries are defined and how they affect economic performance. The property rights approach has provided a formal way to introduce incomplete contracting ideas into economic modeling. The Impact of Incomplete Contracts on Economics collects papers and opinion pieces on the impact that this property right approach to the firm has had on the economics profession.
Book Synopsis Optimal Financing Decisions by : Alexander Allan Robichek
Download or read book Optimal Financing Decisions written by Alexander Allan Robichek and published by . This book was released on 1965 with total page 182 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Debt and Outside Equity as Information Revelation Mechanisms by : Michel A. Habib
Download or read book Debt and Outside Equity as Information Revelation Mechanisms written by Michel A. Habib and published by . This book was released on 1998 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents a unified theory of debt and outside equity based on specialized valuation of the corporate enterprise. We model the decision of an entrepreneur to use debt and equity finance to get credible information from different specialists about the value of the enterprise in various uses across alternative states of the world. The equity valuation specialist -- who could be a venture capitalist or another type of equity partner -- provides a price forecast for equity that reveals demand-side information about the value of the enterprise in the good sates. His equity share represents a claim on the cash flow generated by the enterprise in its primary use. The debt valuation specialist provides a price forecast for debt that reveals information about the value of the enterprise in the bad states. His loan represents a claim on the cash flow generated by the enterprise if redeployed to its next best use. The prices forecast for debt and equity by the valuation specialists credibly reveal their private information because the entrepreneur requires them to buy the associated claim at the forecast price, thereby bonding their valuations. In contrast to recent work on the role of debt and outside equity in communicating supply-side information to outside investors, we focus on the communication of demand-side information to the entrepreneur. We provide testable implications that conflict with those provided by accepted informational explanations for debt and outside inquiry.
