Soft budget constraint and stock price information

Antoine Faure-Grimaud

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This article investigates the ability of regulatory agencies to keep firms to fixed budgets. The budget implemented at an interim date is always superior to the one efficient ex ante, since, at the interim stage, regulators do not internalize the disincentive effect of their intervention on firm's effort. Budget constraints are more or less soft according to the information available to regulators. The ability of financial markets to generate information is endogenized. It is shown that stock price information may increase the softness of the budget constraint, decrease firms' incentives to exert effort and may reduce social welfare. It also appears that the "softness" of these constraints depends on the type of claims used to finance initial investments. A straightforward application of the model sheds light on the privatisation decision.

JEL-codes: D82 G14 G32 L51 (search for similar items in EconPapers)
Date: 1996-11-01
References: Add references at CitEc
Citations:

Downloads: (external link)
http://eprints.lse.ac.uk/119157/ Open access version. (application/pdf)

Related works:
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:ehl:lserod:119157

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().