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Contract Costs and Financing Decisions

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  • Fama, Eugene F

Abstract

Like bondholders, most agents contract for fixed payoffs. Thus, corporate capital structures, which are less than 50 percent debt, are less levered than overall contract structures, in which about 90 percent of total flows are fixed payoffs. The hypothesis analyzed here is that loans and bonds lower contract costs by delegating the monitoring and bonding of the default risks of fixed payoffs to credible specialists (financial intermediaries, bond-holder trustees, rating agencies, and auditors). Other agents can then focus on their specialties, that is, efficient supply of labor, materials, and other services, and the contract problems of these specialties. Copyright 1990 by the University of Chicago.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Business.

Volume (Year): 63 (1990)
Issue (Month): 1 (January)
Pages: S71-91

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Handle: RePEc:ucp:jnlbus:v:63:y:1990:i:1:p:s71-91

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Web page: http://www.journals.uchicago.edu/JB/

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Cited by:
  1. Francesco Corielli & Stefano Gatti & Alessandro Steffanoni, 2010. "Risk Shifting through Nonfinancial Contracts: Effects on Loan Spreads and Capital Structure of Project Finance Deals," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 42(7), pages 1295-1320, October.
  2. Longhofer, Stanley D. & Santos, Joao A. C., 2000. "The Importance of Bank Seniority for Relationship Lending," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 9(1), pages 57-89, January.
  3. Anil K. Kashyap & Jeremy C. Stein, 1994. "Monetary Policy and Bank Lending," NBER Chapters, in: Monetary Policy, pages 221-261 National Bureau of Economic Research, Inc.
  4. Bülent Köksal & Cüneyt Orman, 2014. "Determinants of Capital Structure: Evidence from a Major Developing Economy," EcoMod2014 6405, EcoMod.
  5. Zingales, Luigi, 2000. "In Search of New Foundations," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2551, C.E.P.R. Discussion Papers.
  6. Dailami, Mansoor & Hauswald, Robert, 2007. "Credit-spread determinants and interlocking contracts: A study of the Ras Gas project," Journal of Financial Economics, Elsevier, Elsevier, vol. 86(1), pages 248-278, October.
  7. TSURUTA Daisuke & Peng XU, 2007. "Debt Structure and Bankruptcy of Financially Distressed Small Businesses," Discussion papers, Research Institute of Economy, Trade and Industry (RIETI) 07032, Research Institute of Economy, Trade and Industry (RIETI).
  8. John Armour, 2006. "Should we redistribute in insolvency," ESRC Centre for Business Research - Working Papers, ESRC Centre for Business Research wp319, ESRC Centre for Business Research.
  9. Dailami, Mansoor & Hauswald, Robert, 2003. "The emerging project bond market - covenant provisions and credit spreads," Policy Research Working Paper Series 3095, The World Bank.
  10. A.O. Olakunle & P.L. Jones, 2014. "Assessing the Impact of Size on the Capital Structure Choice for Listed Nigeria Firms," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Scien, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 4(7), pages 184-202, July.
  11. Beatty, Anne & Liao, Scott & Weber, Joseph, 2012. "Evidence on the determinants and economic consequences of delegated monitoring," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 53(3), pages 555-576.
  12. Gérard Charreaux, 1996. "Vers une théorie du gouvernement des entreprises," Working Papers CREGO, Université de Bourgogne - CREGO EA7317 Centre de recherches en gestion des organisations 0960501, Université de Bourgogne - CREGO EA7317 Centre de recherches en gestion des organisations.
  13. Rodolfo Apreda, 2002. "Incremental cash flows, information sets and conflicts of interest," CEMA Working Papers: Serie Documentos de Trabajo., Universidad del CEMA 220, Universidad del CEMA.
  14. Dailami, Mansoor & Hauswald, Robert, 2001. "Contract risks and credit spread determinants in the international project bond market," Policy Research Working Paper Series 2712, The World Bank.

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