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Capital Structure and Risk Management

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  • Karine Gobert

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Abstract

This paper examines the impact of capital structure on the optimality of contingent financial contracts. The role of financial relationships is not only to provide funds but also to offer insurance to a risk adverse entrepreneur through contingent financial transfers. Since such financial relationships are long term, the question is on the depth of the financier's commitment to continue to offer financing in the future. If such a commitment cannot be obtained, insurance cannot be perfect. In that case, the entrepreneur chooses to complement outside insurance with internal financing. Depending on the financier's property rights on the firm's assets, the use of reserves can relax the financing constraints and considerably improve not only the level of insurance obtained through the contract but also the efficiency of investment decisions. This rationalizes the use of convertible debt in venture capital relationships. Cet article présente les impacts de la structure de capital sur l'optimalité des contrats financiers contingents. Le rôle des relations financières est non seulement de fournir des capitaux0501s aussi d'offrir de l'assurance à un entrepreneur riscophobe par des transferts contingents. Comme ces relations sont de longue durée, si le financier ne peut s'engager à toujours offrir du financement dans le futur, l'assurance ne peut pas être parfaite. Dans ce cas, l'entrepreneur choisit de complémenter l'assurance externe par du financement interne. Si le financier n'a pas tous les droits de propriété sur les réserves de la firme, l'utilisation des réserves internes peut relâcher les contraintes de refinancement externe et améliorer considérablement le niveau d'assurance ainsi que l'efficacité des décisions d'investissement. Ce résultat justifie l'usage de dette convertible dans les relations de capital risque.

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Bibliographic Info

Paper provided by CIRANO in its series CIRANO Working Papers with number 2001s-51.

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Date of creation: 01 Sep 2001
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Handle: RePEc:cir:cirwor:2001s-51

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Keywords: Capital structure; venture capital; risk management; long term financial contracts; Structure de capital; capital de risque; gestion des risques; financement de long terme;

References

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  1. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  2. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
  3. Aghion, Philippe & Bolton, Patrick, 1992. "An Incomplete Contracts Approach to Financial Contracting," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 473-94, July.
  4. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-92, July.
  5. Ethan Ligon & Jonathan P. Thomas & Tim Worrall, 2000. "Mutual Insurance, Individual Savings and Limited Commitment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(2), pages 216-246, April.
  6. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-87, May.
  7. Mathias Dewatripont & Jean Tirole, 1994. "A theory of debt and equity: diversity of securities and manager-shareholder congruence," ULB Institutional Repository 2013/9593, ULB -- Universite Libre de Bruxelles.
  8. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  9. Oliver Hart & John Moore, 1991. "A Theory of Debt Based on the Inalienability of Human Capital," NBER Working Papers 3906, National Bureau of Economic Research, Inc.
  10. Gauthier, Celine & Poitevin, Michel & Gonzalez, Patrick, 1997. "Ex Ante Payments in Self-Enforcing Risk-Sharing Contracts," Journal of Economic Theory, Elsevier, vol. 76(1), pages 106-144, September.
  11. GOBERT, Karine & POITEVIN, Michel, 1998. "Non-Commitment and Savings in Dynamic Risk-Sharing Contracts," Cahiers de recherche 9806, Universite de Montreal, Departement de sciences economiques.
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Cited by:
  1. Ricardo N. Bebczuk, 2005. "Corporate Governance and Ownership: Measurement and Impact on Corporate Performance and Dividend Policies in Argentina," Department of Economics, Working Papers 059, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata.

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