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Financial Contracting Under Imperfect Enforcement

  • Tore Ellingsen
  • Eirik Gaard Kristiansen

We develop a model of financial contracting under imperfect enforcement. Financial contracts are designed to keep entrepreneurs from diverting project returns, but enforcement is probabilistic and penalties are limited. The model rationalizes the prevalence of straight debt and common stock, and its predictions are consistent with a host of empirical capital structure regularities. Copyright 2011, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/qje/qjq006
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Article provided by Oxford University Press in its journal The Quarterly Journal of Economics.

Volume (Year): 126 (2011)
Issue (Month): 1 ()
Pages: 323-371

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Handle: RePEc:oup:qjecon:v:126:y:2011:i:1:p:323-371
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  1. Kvaløy, Ola & Olsen, Trond E., 2004. "Endogenous Verifiability in Relational Contracting," Discussion Papers 2004/20, Department of Business and Management Science, Norwegian School of Economics.
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  9. Bull, Jesse & Watson, Joel, 2002. "Evidence Disclosure and Verfiability," University of California at San Diego, Economics Working Paper Series qt19p7z2gm, Department of Economics, UC San Diego.
  10. Hertzel, Michael G & Smith, Richard L, 1993. " Market Discounts and Shareholder Gains for Placing Equity Privately," Journal of Finance, American Finance Association, vol. 48(2), pages 459-85, June.
  11. Erik Berglof & Ernst-Ludwig von Thadden, 1994. "Capital Structure with Multiple Investors," CEPR Financial Markets Paper 0044, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ..
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