Limited liability in business groups
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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References listed on IDEAS
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- 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.
- 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.
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- 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.
- Jeremy C. Stein, 2001. "Agency, Information and Corporate Investment," NBER Working Papers 8342, National Bureau of Economic Research, Inc.
- 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. Full references (including those not matched with items on IDEAS)
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