We present a model in Costly State Verification framework that relates capital raised in a firm to profitability. We explain how optimality of investment is affected by how the aggregate funding affects the expected outcomes of the project. Although we find underinvestment, the problem does not get severe with increasing dead weight costs.
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Find related papers by JEL classification: G00 - Financial Economics - - General - - - General G29 - Financial Economics - - Financial Institutions and Services - - - Other G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
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