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Debt and equity as optimal contracts

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Abstract

Using a principal-agent model in which an entrepreneur has an investment project whose returns depend on his effort, which is not observable by the financier, the author shows that the optimal contract used to finance such a project can be replicated by a unique combination of debt and equity, proving the optimality of these financial instruments. ; A look at the evolution of the collection, clearinghouse, and regulatory provisions of the Federal Reserve Act. The Reserve Banks? check collection service was designed in 1913 to serve as \"glue,\" attaching the new central bank to the commercial and financial markets through member banks.

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  • João A. C. Santos, 1995. "Debt and equity as optimal contracts," Working Papers (Old Series) 9505, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:9505
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    Cited by:

    1. Elijah Brewer & Hesna Genay & William E. Jackson & Paula R. Worthington, 1996. "How are small firms financed? Evidence from small business investment companies," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 20(Nov), pages 2-18.
    2. John Krainer, 2000. "The separation of banking and commerce," Economic Review, Federal Reserve Bank of San Francisco, pages 15-24.
    3. Santos, Joao A. C., 1999. "Bank capital and equity investment regulations," Journal of Banking & Finance, Elsevier, vol. 23(7), pages 1095-1120, July.
    4. Rebecca M. Neumann, 2003. "International capital flows under asymmetric information and costly monitoring: implications of debt and equity financing," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 36(3), pages 674-700, August.
    5. Neumann, Rebecca M., 2006. "The effects of capital controls on international capital flows in the presence of asymmetric information," Journal of International Money and Finance, Elsevier, vol. 25(6), pages 1010-1027, October.
    6. Ben R. Craig, 1996. "Competing currencies: back to the future?," Economic Commentary, Federal Reserve Bank of Cleveland, issue Oct.

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    Contracts; Corporations - Finance;

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