Expropriation Risk, Governance Control and Equilibrium Financial Contract

Yeongjae Kang
Additional contact information
Yeongjae Kang: Department of Economics, Postal: Stockholm School of Economics, Box 6501, 113 83 Stockholm, Sweden

No 166, SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: We present a model of financial contracting in the presence of asymmetric information between entrepreneur and investor. Either liquidation threat or governance control can be used to protect investor’s interests against expropriation risk. The two parties first agree to a financial arrangement which assigns to the parties the ”governance right” to choose the level of governance control and the ”contracting right” to design the financing contract. We show the trade-off between costs of liquidation and governance control determines the equilibrium. In Pareto-efficient equilibrium financial arrangements, a highly profitable project is financed by a contract which relies on liquidation threat so that liquidation occurs with a strictly positive probability. On the other hand, a less profitable project relies on governance control, thereby avoiding liquidation altogether. We relate different equilibrium financial arrangements to the ownership and financial structure of firm.

Keywords: Asymmetric information; liquidation; governance control (search for similar items in EconPapers)
JEL-codes: D82 G32 (search for similar items in EconPapers)
Pages: 26 pages
Date: 1997-04
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://swopec.hhs.se/hastef/papers/hastef0166.ps (application/postscript)
http://swopec.hhs.se/hastef/papers/hastef0166.ps.zip (application/postscript)
http://swopec.hhs.se/hastef/papers/hastef0166.pdf (application/pdf)
http://swopec.hhs.se/hastef/papers/hastef0166.pdf.zip (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:hhs:hastef:0166

Access Statistics for this paper

More papers in SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden. Contact information at EDIRC.
Bibliographic data for series maintained by Helena Lundin ().