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Heterogeneous Beliefs, Moral Hazard, and Capital Structure


  • Jochen Bigus


This paper provides a new approach to the theory of capital structure by emphasizing the issue that investors and entrepreneurs may have heterogeneous beliefs on future firm returns. Heterogeneous beliefs are possible even when there is symmetric information but individuals evaluate the same information differently. Although heterogeneous beliefs might be an important issue in real life, corporate finance theory hardly addresses them. When heterogeneous beliefs and moral hazard exist, a debt-equity mix might outperform pure debt or pure equity. I examine a situation in which there is perk consumption (which favors debt) and heterogeneous beliefs on project risk (which favors equity in case of risk neutrality) and heterogeneous beliefs on the project’s mean (which favors debt). Optimal contracts tend to be highly nonlinear with heterogeneous beliefs.

Suggested Citation

  • Jochen Bigus, 2003. "Heterogeneous Beliefs, Moral Hazard, and Capital Structure," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 55(2), pages 136-160, April.
  • Handle: RePEc:sbr:abstra:v:55:y:2003:i:2:p:136-160

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    Cited by:

    1. Niu Weining & Liu Shancun & Jin Jing, 2014. "Security Issuance and Stock Price Effects with Heterogeneous Beliefs," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 4(10), pages 1332-1346, October.

    More about this item


    Behavioral Finance; Corporate Finance; Heterogeneous Beliefs; Moral Hazard.;

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage


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