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- Title
Financial Contracting under Risk Neutrality, Limited Liability and Ex ante Asymmetric Information.
- Authors
Innes, Robert
- Abstract
This paper derives equilibrium financial contract forms in a risk-neutral capital market with asymmetrically informed borrowers/entrepreneurs and investors. In doing so, the analysis generalizes the work of DeMeza and Webb (1987) by allowing for arbitrary profit distributions, arbitrary contract forms and variable investment choices. The main result of this inquiry is as follows. When higher-quality entrepreneurs have 'better' ex post profit distributions (in the sense of the monotone likelihood ratio property), equilibrium contracts take a standard debt form so long as admissible investor payoff functions are monotone non-decreasing in firm profit. Without the monotonicity constraint, contracts often take a different, 'live-or-die' form.
- Subjects
CONTRACTS; CAPITAL market; MARKET equilibrium; FINANCIAL management; FINANCE
- Publication
Economica, 1993, Vol 60, Issue 237, p27
- ISSN
0013-0427
- Publication type
Article
- DOI
10.2307/2554729