IDEAS home Printed from https://ideas.repec.org/a/bla/jbfnac/v27y2000i9-10p1349-1374.html
   My bibliography  Save this article

Optimal Entrepreneurial Financial Contracting

Author

Listed:
  • M. Shahid Ebrahim
  • Ike Mathur

Abstract

This paper studies the optimal financing (capital structure) of entrepreneurial activity in the context of risk‐aversion by incorporating the deadweight costs of bankruptcy and taxes. Unlike the extreme debt ratio (corner solution) predicted by scholars using linear models, this paper provides unique interior results for risk‐free as well as risky debt, irrespective of corporate taxes. The paper also shows the necessary and sufficient conditions for both forms of debt, and the pareto‐optimality of one over the other. The important findings of this paper are: (i) the existence of an equilibrium, where the borrowing interest rate is greater than the lending rate, despite the violation of Fisher separation theorem (1930); (ii) wealth plays a critical role in determining the debt ratio and the equilibrium risk‐free rate of interest, complementing the De Meza and Webb (1987 and 1999) studies; (iii) an explanation for the preferred stock and income bond puzzles, extending Fooladi et al. (1991) and McConnell and Schlarbaum (1991).

Suggested Citation

  • M. Shahid Ebrahim & Ike Mathur, 2000. "Optimal Entrepreneurial Financial Contracting," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 27(9‐10), pages 1349-1374, November.
    • Handle: RePEc:bla:jbfnac:v:27:y:2000:i:9-10:p:1349-1374
    DOI: 10.1111/1468-5957.00360
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/1468-5957.00360
    Download Restriction: no
    File URL: https://libkey.io/10.1111/1468-5957.00360?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ebrahim, M. Shahid & Mathur, Ike, 2007. "Pricing home mortgages and bank collateral: A rational expectations approach," Journal of Economic Dynamics and Control, Elsevier, vol. 31(4), pages 1217-1244, April.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jbfnac:v:27:y:2000:i:9-10:p:1349-1374. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0306-686X .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.