Endogenous Debt Contracts With Undistorted Incentives

Paul Povel and Michael Raith ()

No 99-61, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

Abstract: We study a firm's incentives in an environment in which optimal contracts resemble debt. After agreeing to the terms of a financial contract, but before its earnings are realised, a firm has to take a decision which affects its cash flows. This decision cannot be observed by the lender; this is meant to capture risk-shifting possibilities fr

Pages: 40 pages
Date: 1999-03-15
Note: Financial Support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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