A Theory of Outside Equity: Financing Multiple Projects

Bougheas, Spiros; Wang, Tianxi

Abstract

In the financial economics literature debt contracts provide optimal solutions for addressing managerial moral hazard problems. We analyze a model with multiple projects where the manager obtains private information about their quality after the contract with investors is agreed. The likelihood of success of each project depends on both its quality and the level of effort exerted on it by the manager. We find distributions of the quality shock such that the optimal financial contract requires the investor to hold an equity claim. Our model addresses issues that are relevant for financial intermediation and corporate governance.

Citation

Bougheas, S., & Wang, T. (2021). A Theory of Outside Equity: Financing Multiple Projects. Journal of Corporate Finance, 69, Article 102025. https://doi.org/10.1016/j.jcorpfin.2021.102025

• Journal Article Type: Article
• Acceptance Date: Jun 21, 2021
• Online Publication Date: Jun 24, 2021
• Publication Date: Aug 1, 2021
• Deposit Date: Jun 22, 2021
• Publicly Available Date: Dec 25, 2022
• Journal: Journal of Corporate Finance
• Print ISSN: 0929-1199
• Electronic ISSN: 0929-1199
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 69
• Article Number: 102025
• DOI: https://doi.org/10.1016/j.jcorpfin.2021.102025
• Keywords: Outside Equity; Financial Contracts, Principal Agent Model
• Public URL: https://nottingham-repository.worktribe.com/output/5718672
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S0929119921001462?via%3Dihub