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Financial Contracting Under Imperfect Enforcement

Tore Ellingsen () and Eirik Gaard Kristiansen

The Quarterly Journal of Economics, 2011, vol. 126, issue 1, 323-371

Abstract: We develop a model of financial contracting under imperfect enforcement. Financial contracts are designed to keep entrepreneurs from diverting project returns, but enforcement is probabilistic and penalties are limited. The model rationalizes the prevalence of straight debt and common stock, and its predictions are consistent with a host of empirical capital structure regularities. Copyright 2011, Oxford University Press.

Date: 2011
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