A theory of outside equity: Financing multiple projects

Spiros Bougheas and Tianxi Wang

Journal of Corporate Finance, 2021, vol. 69, issue C

Abstract: In the financial economics literature debt contracts provide optimal solutions for addressing managerial moral hazard problems. We analyze a model with multiple projects where the manager obtains private information about their quality after the contract with investors is agreed. The likelihood of success of each project depends on both its quality and the level of effort exerted on it by the manager. We find distributions of the quality shock such that the optimal financial contract requires the investor to hold an equity claim. Our model addresses issues that are relevant for financial intermediation and corporate governance.

Keywords: Outside equity; Financial contracts; Principal agent model (search for similar items in EconPapers)
JEL-codes: D86 G30 (search for similar items in EconPapers)
Date: 2021
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Working Paper: A Theory of Outside Equity: Financing Multiple Projects (2019)
Working Paper: A theory of outside equity: Financing multiple projects (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:69:y:2021:i:c:s0929119921001462

DOI: 10.1016/j.jcorpfin.2021.102025

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