The Choice Between Bank Debt and Equity

Lars Jebjerg () and Søren Kyhl
Additional contact information
Søren Kyhl: Institute of Economics, University of Copenhagen

No 99-18, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: : This paper develops a model of financing choice by an entrepreneur about to undertake a project. The entrepreneur is essential for the project but cash-constrained. Thus, he must sell part of the project to outside investors, while remaining in control as a manager. To finance the project he can sell shares to outside equityholders or approach a bank for a loan. The optimal financial structure trades-off an efficient project choice and efficient effort levels. Equity financing does not directly distort the project choice but has a distortionary effect on effort, which in turn may lead to an inefficient choice of project. Bank financing may lead to an inefficient project choice but creates only little effort distrotion for a given project. It is shown that the optimal financial structure varies with project characteristics and the external financing requirement.

Keywords: corporate finance; capital structure; banks (search for similar items in EconPapers)
JEL-codes: G21 G32 (search for similar items in EconPapers)
Pages: 27 pages
Date: 1999-07
References: Add references at CitEc
Citations: View citations in EconPapers (2)

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

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:kud:kuiedp:9918

Access Statistics for this paper

More papers in Discussion Papers from University of Copenhagen. Department of Economics Oester Farimagsgade 5, Building 26, DK-1353 Copenhagen K., Denmark. Contact information at EDIRC.
Bibliographic data for series maintained by Thomas Hoffmann ().