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A Theory of Outside Equity: Financing Multiple Projects

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  • Spiros Bougheas
  • Tianxi Wang

Abstract

In the financial economics literature debt contracts provide efficient solutions for addressing managerial moral hazard problems. We analyze a model with multiple projects where the manager obtains private information about their quality after the contract with investors is agreed. The likelihood of success of each project depends on both its quality and the level of effort exerted on it by the manager. We find that, depending on the distribution of the quality shock, the optimal financial contract can be either debt or equity.

Suggested Citation

  • Spiros Bougheas & Tianxi Wang, 2019. "A Theory of Outside Equity: Financing Multiple Projects," CESifo Working Paper Series 7466, CESifo.
    • Handle: RePEc:ces:ceswps:_7466
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    More about this item

    Keywords

    outside equity; financial contracts; principal agent model;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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