Renegotiation and the Impossibility of Optimal Investment
AbstractIn a model with asymmetric information and external equity financing, it is impossible to achieve socially optimal investment because of renegotiation possibilities. The contractual solution suggested by Dybvig and Zender (1991) is not dynamically consistent--the manager's contract would be renegotiated, resulting in inefficient investment. Moreover, no other compensation contract that would induce the manager to invest efficiently survives renegotiation. Contracts that pay the manager based on the stock price, while producing suboptimal investment as in Myers and Majluf (1984), are robust to renegotiation. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Society for Financial Studies in its journal Review of Financial Studies.
Volume (Year): 7 (1994)
Issue (Month): 2 ()
Contact details of provider:
Postal: Oxford University Press, Journals Department, 2001 Evans Road, Cary, NC 27513 USA.
Web page: http://www.rfs.oupjournals.org/
More information through EDIRC
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Oliver Hart, 2001.
NBER Working Papers
8285, National Bureau of Economic Research, Inc.
- Oliver Hart, 2001. "Financial Contracting," Harvard Institute of Economic Research Working Papers 1924, Harvard - Institute of Economic Research.
- John C. Persons, . "Fully Revealing Equilibria with Suboptimal Investment," Research in Financial Economics 9507, Ohio State University.
- Yermack, David, 2006. "Flights of fancy: Corporate jets, CEO perquisites, and inferior shareholder returns," Journal of Financial Economics, Elsevier, vol. 80(1), pages 211-242, April.
- Kang, Jun-Koo & Stulz, Rene M, 1996.
"How Different Is Japanese Corporate Finance? An Investigation of the Information Content of New Security Issues,"
Review of Financial Studies,
Society for Financial Studies, vol. 9(1), pages 109-39.
- Jun-Koo Kang & Rene M. Stulz, 1994. "How Different is Japanese Corporate Finance? An Investigation of the Information Content of New Security Issues," NBER Working Papers 4908, National Bureau of Economic Research, Inc.
- Persons, John C., 2000. "Fully revealing equilibria with suboptimal investment," Journal of Corporate Finance, Elsevier, vol. 6(3), pages 331-344, September.
- Baranchuk, Nina & Dybvig, Philip H. & Yang, Jun, 2010. "Renegotiation-proof contracting, disclosure, and incentives for efficient investment," Journal of Economic Theory, Elsevier, vol. 145(5), pages 1805-1836, September.
- Hayes, Rachel M. & Schaefer, Scott, 2009. "CEO pay and the Lake Wobegon Effect," Journal of Financial Economics, Elsevier, vol. 94(2), pages 280-290, November.
- Douglas, Alan V. S., 2002. "Capital structure and the control of managerial incentives," Journal of Corporate Finance, Elsevier, vol. 8(4), pages 287-311, October.
- Caroline Fohlin, 1998. "Banking systems and economic growth: lessons from Britain and Germany in the pre-World War I era," Review, Federal Reserve Bank of St. Louis, issue May, pages 37-48.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Oxford University Press) or (Christopher F. Baum).
If references are entirely missing, you can add them using this form.