Optimal Contracting, Corporate Finance, and Valuation with Inalienable Human Capital

Patrick Bolton, Neng Wang and Jinqiang Yang

No 20979, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A risk-averse entrepreneur with access to a profitable venture needs to raise funds from investors. She cannot indefinitely commit her human capital to the venture, which limits the firm’s debt capacity, distorts investment and compensation, and constrains the entrepreneur’s risk-sharing. This puts dynamic liquidity and state-contingent risk allocation at the center of corporate financial management. The firm balances mean-variance investment efficiency and the preservation of financial slack. We show that in general the entrepreneur’s net worth is overexposed to idiosyncratic risk and underexposed to systematic risk. These distortions are greater the closer the firm is to exhausting its debt capacity.

JEL-codes: G3 G32 (search for similar items in EconPapers)
Date: 2015-02
New Economics Papers: this item is included in nep-ban, nep-cta, nep-mfd and nep-rmg
Note: CF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published as PATRICK BOLTON & NENG WANG & JINQIANG YANG, 2019. "Optimal Contracting, Corporate Finance, and Valuation with Inalienable Human Capital," The Journal of Finance, vol 74(3), pages 1363-1429.

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Journal Article: Optimal Contracting, Corporate Finance, and Valuation with Inalienable Human Capital (2019)
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