Financing and corporate growth under repeated moral hazard

Ronald W. Anderson and Kjell Nyborg

Journal of Financial Intermediation, 2011, vol. 20, issue 1, 1-24

Abstract: We develop an incomplete contracts model to study the extent to which control rights of different financings affect corporate growth. The model admits a standard hold-up problem under equity financing; insiders may be disincentivized to do R&D because outside investors can use their control rights to expropriate large parts of the returns by hiring more efficient managers in the future. Debt financing may give rise to a double moral hazard problem; both managers and shareholders may divert corporate resources to themselves before debt is serviced. However, in many cases, these phenomena do not occur in equilibrium and control rights are irrelevant. Cross-sectional predictions are derived from those cases where control rights matter. Consistent with the empirical evidence, leverage is inversely related to growth and to profitability.

Keywords: Financing; Leverage; Control; rights; Growth; Moral; hazard; Hold-up; Dynamic; capital; structure; Internal; and; external; equity (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1042-9573(09)00061-8
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Financing and Corporate Growth under Repeated Moral Hazard (2001)
Working Paper: Financing and corporate growth under repeated moral hazard (2001)
Working Paper: Financing and Corporate Growth under Repeated Moral Hazard (2001)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:20:y:2011:i:1:p:1-24

Access Statistics for this article

Journal of Financial Intermediation is currently edited by Elu von Thadden

More articles in Journal of Financial Intermediation from Elsevier
Bibliographic data for series maintained by Catherine Liu ().