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Equity or Debt? Contracts in Markets with Asymmetric Information

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  • Bracoud, Frederique
  • Hillier, Brian

Abstract

Four cases of a selection problem are examined where knowledge of the distributions from which project returns are drawn is private to entrepreneurs with projects. Diagrammatic analysis is used to determine the contract form offered by funding banks which choose between debt, equity or a more general contract. Two variants of the problem are novel. One new case indicates that some projects will receive equity finance and others debt finance, the other that the choice between debt or equity depends upon the level of the deposit interest rate. The efficiency of the level and composition of investment is examined. Copyright 2000 by Blackwell Publishers Ltd and The Victoria University of Manchester

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Bibliographic Info

Article provided by University of Manchester in its journal Manchester School.

Volume (Year): 68 (2000)
Issue (Month): 1 (January)
Pages: 1-23

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Handle: RePEc:bla:manchs:v:68:y:2000:i:1:p:1-23

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Cited by:
  1. Anton Miglo, 2007. "A note on corporate taxation, limited liability, and asymmetric information," Working Papers 0704, University of Guelph, Department of Economics and Finance.

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