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A theory of outside equity: Financing multiple projects

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  • Bougheas, Spiros
  • Wang, Tianxi

Abstract

In the financial economics literature debt contracts provide optimal solutions for addressing managerial moral hazard problems. We analyze a model with multiple projects where the manager obtains private information about their quality after the contract with investors is agreed. The likelihood of success of each project depends on both its quality and the level of effort exerted on it by the manager. We find distributions of the quality shock such that the optimal financial contract requires the investor to hold an equity claim. Our model addresses issues that are relevant for financial intermediation and corporate governance.

Suggested Citation

  • Bougheas, Spiros & Wang, Tianxi, 2021. "A theory of outside equity: Financing multiple projects," Journal of Corporate Finance, Elsevier, vol. 69(C).
  • Handle: RePEc:eee:corfin:v:69:y:2021:i:c:s0929119921001462
    DOI: 10.1016/j.jcorpfin.2021.102025
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    More about this item

    Keywords

    Outside equity; Financial contracts; Principal agent model;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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