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Dynamic Security Design and Corporate Financing

In: Handbook of the Economics of Finance

Author

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  • Sannikov, Yuliy

Abstract

This essay considers dynamic security design and corporate financing, with particular emphasis on informational microfoundations. The central idea is that firm insiders must retain an appropriate share of firm risk, either to align their incentives with those of outside investors (moral hazard) or to signal favorable information about the quality of the firm’s assets. Informational problems lead to inevitable inefficiencies—imperfect risk sharing, the possibility of bankruptcy, investment distortions, etc. The design of contracts that minimize these inefficiencies is a central question. This essay explores the implications of dynamic security design on firm operations and asset prices.

Suggested Citation

  • Sannikov, Yuliy, 2013. "Dynamic Security Design and Corporate Financing," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 71-122, Elsevier.
    • Handle: RePEc:eee:finchp:2-a-71-122
    DOI: 10.1016/B978-0-44-453594-8.00002-1
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    Citations

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    Cited by:

    1. Huang, Chong & Oehmke, Martin & Zhong, Hongda, 2019. "A theory of multiperiod debt structure," LSE Research Online Documents on Economics 90429, London School of Economics and Political Science, LSE Library.
    2. Patrick Bolton & Ye Li & Neng Wang & Jinqiang Yang, 2020. "Dynamic Banking and the Value of Deposits," NBER Working Papers 28298, National Bureau of Economic Research, Inc.
    3. Caio Machado, 2024. "Coordinating in Financial Crises," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 54, October.
    4. Jianjun Miao & Alejandro Rivera, 2016. "Robust Contracts in Continuous Time," Econometrica, Econometric Society, vol. 84(4), pages 1405-1440, July.
    5. Ch.-M. CHEVALIER, 2018. "Financial constraints of innovative firms and sectoral growth," Documents de Travail de l'Insee - INSEE Working Papers g2018-05, Institut National de la Statistique et des Etudes Economiques.
    6. João Pinto & Mário Coutinho dos Santos, 2014. "Corporate Financing Choices after the 2007-2008 Financial Crisis," Working Papers de Economia (Economics Working Papers) 03, Católica Porto Business School, Universidade Católica Portuguesa.
    7. repec:zbw:bofrdp:2017_015 is not listed on IDEAS
    8. Rohit Lamba & Ilia Krasikov, 2017. "A Theory of Dynamic Contracting with Financial Constraints," 2017 Meeting Papers 1544, Society for Economic Dynamics.
    9. Patrick Bolton & Neng Wang & Jinqiang Yang, 2016. "Liquidity and Risk Management: Coordinating Investment and Compensation Policies," 2016 Meeting Papers 1703, Society for Economic Dynamics.
    10. Fong, Yuk-fai & Li, Jin, 2017. "Relational contracts, limited liability, and employment dynamics," Journal of Economic Theory, Elsevier, vol. 169(C), pages 270-293.
    11. Krasikov, Ilia & Lamba, Rohit, 2021. "A theory of dynamic contracting with financial constraints," Journal of Economic Theory, Elsevier, vol. 193(C).
    12. Vasama, Suvi, 2017. "On moral hazard and persistent private information," Bank of Finland Research Discussion Papers 15/2017, Bank of Finland.
    13. Vasama, Suvi, 2017. "On moral hazard and persistent private information," Research Discussion Papers 15/2017, Bank of Finland.

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