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Limited liability in business groups


  • Ropero Moriones, Eva


We consider a model in which a holding company has to decide whether to finance an investment project in a subsidiary. The project can be financed either through internal capital or through debt. The subsidiary's manager has private information on the quality of the project and has empirebuilding preferences. When bankruptcy is costly for the subsidiary's manager, the choice between internal and external financing is part of an optimal mechanism that induces truthful revelation of the information. The first best solution can be approached if the cost of bankruptcy for the manager is high enough.

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  • Ropero Moriones, Eva, 2005. "Limited liability in business groups," DEE - Working Papers. Business Economics. WB wb057617, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
  • Handle: RePEc:cte:wbrepe:wb057617

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    References listed on IDEAS

    1. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    2. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    3. Stulz, ReneM., 1990. "Managerial discretion and optimal financing policies," Journal of Financial Economics, Elsevier, vol. 26(1), pages 3-27, July.
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    5. Naveen Khanna, 2001. "The Bright Side of Internal Capital Markets," Journal of Finance, American Finance Association, vol. 56(4), pages 1489-1528, August.
    6. Roberta DessÌ & Donald Robertson, 2003. "Debt, Incentives and Performance: Evidence from UK Panel Data," Economic Journal, Royal Economic Society, vol. 113(490), pages 903-919, October.
    7. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    8. Stein, Jeremy C., 2003. "Agency, information and corporate investment," Handbook of the Economics of Finance,in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 2, pages 111-165 Elsevier.
    9. Harris, Milton & Raviv, Artur, 1996. " The Capital Budgeting Process: Incentives and Information," Journal of Finance, American Finance Association, vol. 51(4), pages 1139-1174, September.
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