Moral Hazard and Capital Structure Dynamics, Second Version

Moral Hazard and Capital Structure Dynamics, Second Version
Author: Mathias Dewatripont
Publisher:
Total Pages: 55
Release: 2003
Genre:
ISBN:
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We base a contracting theory for a start-up firm on an agency model with observable but nonverifiable effort, and renegotiable contracts. Two essential restrictions on simple contracts are imposed: The entrepreneur must be given limited liability, and the investor's earnings must not decrease in the realized profit of the firm. All message game contracts with pure strategy equilibria (and no third parties) are considered. Within this class of contracts/equilibria, and regardless of who has the renegotiating bargaining power, debt and convertible debt maximize the entrepreneur's incentives to exert effort. These contracts are optimal if the entrepreneur has the bargaining power in renegotiation. If the investor has the bargaining power, the same is true unless debt induces excessive effort. In the latter case, a non-debt simple contract achieves efficiency; the non-contractibility of effort does not lower welfare. Thus, when the non-contractibility of effort matters, our results mirror typical capital structure dynamics: An early use of debt claims, followed by a switch to equity-like claims.

Dynamic Investment with Adverse Selection and Moral Hazard

Dynamic Investment with Adverse Selection and Moral Hazard
Author: Miguel Cantillo
Publisher:
Total Pages: 40
Release: 2017
Genre:
ISBN:
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This paper develops a dynamic model of capital structure and investment. In a world with low and high ability managers, the former mask as the latter, but to do so have to overstate both earnings and investment. Debt is a mechanism that eventually separates investors' abilities, at the cost of intervening unlucky high productivity managers. Immediate separation is counterproductive, as it generates costs and no expected payoff. The security design that asymptotically implements optimal investment includes the use of excess non-operating cash, of proportional cash flow compensation, and of "golden parachutes". Relative to a first best case, high ability managers will underinvest. Low ability managers will generally overinvest, except when their firm is close to bankruptcy, in which case they will loot the company by underinvesting and overstating their earnings.

Capital Structure and Risk Dynamics Among Banks

Capital Structure and Risk Dynamics Among Banks
Author: Keegan Floquet
Publisher: LAP Lambert Academic Publishing
Total Pages: 280
Release: 2011-03
Genre:
ISBN: 9783844312058
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In an attempt to restore banking stability and safety during the 1980's, bank regulators typically introduced explicit minimum capital regulation to increase capital ratios and moderate risk-taking. The effects of bank regulation on the capital and risk levels of banks are not always as intended; in some cases, promoting moral hazard behaviour and further increasing the probability of insolvency. Some of these effects were at the roots of the Global Financial Crisis. This book aims to explore in greater detail the relationship between capital and risk, the reasons for this relationship and why this relationship in emerging market banks may differ from that of banks in developed markets. A comprehensive analysis of corporate financial theory relating to capital and risk are carried out and form the theoretical basis of this study.

Moral Hazard, Investment, and Firm Dynamics

Moral Hazard, Investment, and Firm Dynamics
Author: Hengjie Ai
Publisher:
Total Pages: 61
Release: 2014
Genre:
ISBN:
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We present a dynamic general equilibrium model with heterogeneous firms. Owners of the firms delegate investment decisions to managers, whose consumption and investment are private information. We solve the optimal incentive compatible contracts and characterize the implied firm dynamics. Optimal risk sharing requires managers' equity share decrease with the firm size. This in turn implies that it is harder to prevent private benefit in larger firms, where managers have lower equity stake under the optimal contract. Consequently, smaller firms invest more, pay less dividends, and grow faster. Quantitatively, we show that our model is consistent with the Pareto-like size distribution of firms in the data, as well as the pattern of the relationships between firm size and firms' investment and dividend policies.

The Handbook of the Economics of Corporate Governance

The Handbook of the Economics of Corporate Governance
Author: Benjamin Hermalin
Publisher: Elsevier
Total Pages: 762
Release: 2017-09-18
Genre: Business & Economics
ISBN: 0444635408
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The Handbook of the Economics of Corporate Governance, Volume One, covers all issues important to economists. It is organized around fundamental principles, whereas multidisciplinary books on corporate governance often concentrate on specific topics. Specific topics include Relevant Theory and Methods, Organizational Economic Models as They Pertain to Governance, Managerial Career Concerns, Assessment & Monitoring, and Signal Jamming, The Institutions and Practice of Governance, The Law and Economics of Governance, Takeovers, Buyouts, and the Market for Control, Executive Compensation, Dominant Shareholders, and more. Providing excellent overviews and summaries of extant research, this book presents advanced students in graduate programs with details and perspectives that other books overlook. Concentrates on underlying principles that change little, even as the empirical literature moves on Helps readers see corporate governance systems as interrelated or even intertwined external (country-level) and internal (firm-level) forces Reviews the methodological tools of the field (theory and empirical), the most relevant models, and the field’s substantive findings, all of which help point the way forward