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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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