 Anticipating Disagreement in Dynamic Contracting*An incomplete contracts approach to financial contractingReview of Finance, 2022, vol. 26, issue 5, 1241-1265 Abstract: This paper studies how anticipated disagreement between a financier and an entrepreneur affects optimal contracting and asset prices. The value of debt is uniquely immune to anticipated disagreement, and when the set of anticipated disagreements is sufficiently rich, this immunity causes the optimal contract to give the financier debt. In contrast, the values of other contracts, including equity, decline as anticipated disagreement becomes more severe. This suggests a channel through which an increase in the severity of anticipated disagreement increases the equity premium and the debt-to-equity ratio. Keywords: Disagreement; Uncertainty; Ambiguity; Robustness; Debt; Overconfidence; Overinvestment; Refinance; Renegotiation; Equity premium; Debt-to-equity ratio; Security design; Financial contracting; Optimal contracting (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:oup:revfin:v:26:y:2022:i:5:p:1241-1265. Ordering information: This journal article can be ordered from Access Statistics for this article Review of Finance is currently edited by Marcin Kacperczyk More articles in Review of Finance from European Finance Association Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK. Contact information at EDIRC. |
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