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Financing under Extreme Risk: Contract Terms and Returns to Private Investments in Public Equity

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  • Susan Chaplinsky
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    Abstract

    We study financial contracting using transactions from the private investments in public equity market. Our tests show that the use of terms that are contingent on an issuer's future performance increases with issuer risk. Among issuers with poorer stock performance, higher cash burn rates, and more uncertain investment prospects, purchase discount-only contracts are uncommon and contracts with contingent terms are frequently used. Our evidence also supports arguments that issuer bargaining power with investors erodes as financing alternatives grow more limited. In particular, terms that can transfer control to investors are most commonly used by issuers in the weakest financial condition. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

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    File URL: http://hdl.handle.net/10.1093/rfs/hhq035
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    Bibliographic Info

    Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

    Volume (Year): 23 (2010)
    Issue (Month): 7 (July)
    Pages: 2789-2820

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    Handle: RePEc:oup:rfinst:v:23:y:2010:i:7:p:2789-2820

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    Cited by:
    1. Emna JABALLAH & Wided YOUSFI & Mohamed Ali ZARAI, 2014. "Quality of financial reports: Evidence from the Tunisian firms," E3 Journal of Business Management and Economics., E3 Journals, vol. 5(2), pages 030-038.

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