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Limited Liability In Business Groups

  • Eva Ropero Moriones

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    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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    File URL: http://docubib.uc3m.es/WORKINGPAPERS/WB/wb057617.pdf
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    Paper provided by Universidad Carlos III, Departamento de Economía de la Empresa in its series Business Economics Working Papers with number wb057617.

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    Date of creation: Dec 2005
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    Handle: RePEc:cte:wbrepe:wb057617
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    1. Jeremy C. Stein, 2001. "Agency, Information and Corporate Investment," NBER Working Papers 8342, National Bureau of Economic Research, Inc.
    2. Harris, Milton & Raviv, Artur, 1996. " The Capital Budgeting Process: Incentives and Information," Journal of Finance, American Finance Association, vol. 51(4), pages 1139-74, September.
    3. 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.
    4. Roberta Dessí & Donald Robertson, 2000. "Debt, Incentives and Performance: Evidence from UK Panel Data," FMG Discussion Papers dp344, Financial Markets Group.
    5. Naveen Khanna, 2001. "The Bright Side of Internal Capital Markets," Journal of Finance, American Finance Association, vol. 56(4), pages 1489-1528, 08.
    6. M. Harris & C. H. Kriebel & A. Raviv, 1982. "Asymmetric Information, Incentives and Intrafirm Resource Allocation," Management Science, INFORMS, vol. 28(6), pages 604-620, June.
    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. Stulz, ReneM., 1990. "Managerial discretion and optimal financing policies," Journal of Financial Economics, Elsevier, vol. 26(1), pages 3-27, July.
    9. 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.
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