Disputes, Debt and Equity

Alfred Duncan and Charles Nolan

Working Papers from Business School - Economics, University of Glasgow

Abstract: We show how the prospect of disputes over firms’ revenue reports promotes debt financing over equity. These findings are presented within a costly state verification model with a risk averse entrepreneur. The prospect of disputes encourages incentive regimes which limit penalties and avoid stochastic monitoring, even when the lender can commit to stochastic enforcement strategies. Consequently, optimal contracts shift away from equity and toward standard debt. For a useful special case of the model, closed form solutions are presented for leverage and consumption allocations under efficient debt contracts.

Keywords: Microeconomics, costly state verification; external finance (search for similar items in EconPapers)
JEL-codes: D52 D53 D82 D86 (search for similar items in EconPapers)
Date: 2014-12
New Economics Papers: this item is included in nep-cba, nep-dge, nep-eec, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Disputes, debt and equity (2019)
Working Paper: DISPUTES, DEBT AND EQUITY (2017)
Working Paper: Disputes, Debt and Equity (2017)
Working Paper: Disputes, Debt and Equity (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2014_20

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