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Contract Costs and Financing Decisions

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  • Fama, Eugene F

Abstract

Like bondholders, most agents contract for fixed payoffs. Thus, corporate capital structures, which are less than 50 percent debt, are less levered than overall contract structures, in which about 90 percent of total flows are fixed payoffs. The hypothesis analyzed here is that loans and bonds lower contract costs by delegating the monitoring and bonding of the default risks of fixed payoffs to credible specialists (financial intermediaries, bond-holder trustees, rating agencies, and auditors). Other agents can then focus on their specialties, that is, efficient supply of labor, materials, and other services, and the contract problems of these specialties. Copyright 1990 by the University of Chicago.

Suggested Citation

  • Fama, Eugene F, 1990. "Contract Costs and Financing Decisions," The Journal of Business, University of Chicago Press, vol. 63(1), pages 71-91, January.
  • Handle: RePEc:ucp:jnlbus:v:63:y:1990:i:1:p:s71-91
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    Cited by:

    1. Luigi Zingales, 2000. "In Search of New Foundations," Journal of Finance, American Finance Association, vol. 55(4), pages 1623-1653, August.
    2. Joshua D. Rauh & Amir Sufi, 2010. "Capital Structure and Debt Structure," Review of Financial Studies, Society for Financial Studies, vol. 23(12), pages 4242-4280, December.
    3. Dailami, Mansoor & Hauswald, Robert, 2003. "The emerging project bond market - covenant provisions and credit spreads," Policy Research Working Paper Series 3095, The World Bank.
    4. Bülent Köksal & Cüneyt Orman, 2015. "Determinants of capital structure: evidence from a major developing economy," Small Business Economics, Springer, vol. 44(2), pages 255-282, February.
    5. Dailami, Mansoor & Hauswald, Robert, 2001. "Contract risks and credit spread determinants in the international project bond market," Policy Research Working Paper Series 2712, The World Bank.
    6. Dailami, Mansoor & Hauswald, Robert, 2007. "Credit-spread determinants and interlocking contracts: A study of the Ras Gas project," Journal of Financial Economics, Elsevier, vol. 86(1), pages 248-278, October.
    7. Anil K. Kashyap & Jeremy C. Stein, 1994. "Monetary Policy and Bank Lending," NBER Chapters,in: Monetary Policy, pages 221-261 National Bureau of Economic Research, Inc.
    8. Sanjiva Prasad & Christopher J. Green & Victor Murinde, 2001. "Company Financing, Captial Structure, and Ownership: A Survey, and Implications for Developing Economies," SUERF Studies, SUERF - The European Money and Finance Forum, number 12 edited by Morten Balling, March.
    9. Longhofer, Stanley D. & Santos, Joao A. C., 2000. "The Importance of Bank Seniority for Relationship Lending," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 57-89, January.
    10. Régis BLAZY & Nirjhar NIGAM, 2018. "Corporate insolvency procedures in England: The uneasy case for liquidations," Working Papers of LaRGE Research Center 2018-02, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    11. Karlyn Mitchell, 1993. "The Debt Maturity Choice: An Empirical Investigation," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 16(4), pages 309-320, December.
    12. Guillaume Plantin, "undated". "Tranching," GSIA Working Papers 2005-E2, Carnegie Mellon University, Tepper School of Business.
    13. John Armour, 2006. "Should we redistribute in insolvency," Working Papers wp319, Centre for Business Research, University of Cambridge.
    14. Gérard Charreaux, 1996. "Vers une théorie du gouvernement des entreprises," Working Papers CREGO 0960501, Université de Bourgogne - CREGO EA7317 Centre de recherches en gestion des organisations.
    15. Rodolfo Apreda, 2002. "Incremental cash flows, information sets and conflicts of interest," CEMA Working Papers: Serie Documentos de Trabajo. 220, Universidad del CEMA.
    16. A.O. Olakunle & P.L. Jones, 2014. "Assessing the Impact of Size on the Capital Structure Choice for Listed Nigeria Firms," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 4(7), pages 184-202, July.
    17. TSURUTA Daisuke & Peng XU, 2007. "Debt Structure and Bankruptcy of Financially Distressed Small Businesses," Discussion papers 07032, Research Institute of Economy, Trade and Industry (RIETI).
    18. Beatty, Anne & Liao, Scott & Weber, Joseph, 2012. "Evidence on the determinants and economic consequences of delegated monitoring," Journal of Accounting and Economics, Elsevier, vol. 53(3), pages 555-576.
    19. Francesco Corielli & Stefano Gatti & Alessandro Steffanoni, 2010. "Risk Shifting through Nonfinancial Contracts: Effects on Loan Spreads and Capital Structure of Project Finance Deals," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(7), pages 1295-1320, October.
    20. Jakob Müllner, 2017. "International project finance: review and implications for international finance and international business," Management Review Quarterly, Springer;Vienna University of Economics and Business, vol. 67(2), pages 97-133, April.

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