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Corporate Finance, Incomplete Contracts, and Corporate Control

Author

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  • Patrick Bolton

Abstract

This essay in celebration of Grossman and Hart (GH) (Grossman, S., and H. Oliver. 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," 94 Journal of Political Economy 691–719.) discusses how the introduction of incomplete contracts has fundamentally changed economists’ perspectives on corporate finance and control. Before GH, the dominant theory in corporate finance was the tradeoff theory pitting the tax advantages of debt (relative to equity) against bankruptcy costs. After GH, this theory has been enriched by the introduction of control considerations and investor protection issues. This essay assesses how our understanding of corporate finance has been improved as a result and where the incomplete contracts perspective has not yet been successfully applied. (JEL G30, G32, G33).

Suggested Citation

  • Patrick Bolton, 2014. "Corporate Finance, Incomplete Contracts, and Corporate Control," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 30(suppl_1), pages 64-81.
    • Handle: RePEc:oup:jleorg:v:30:y:2014:i:suppl_1:p:i64-i81.
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    File URL: http://hdl.handle.net/10.1093/jleo/ewt010
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    Cited by:

    1. Dan A. Iancu & Nikolaos Trichakis & Gerry Tsoukalas, 2017. "Is Operating Flexibility Harmful Under Debt?," Management Science, INFORMS, vol. 63(6), pages 1730-1761, June.

    More about this item

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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