Debt and Equity as Optimal Contracts

Posted: 18 Jul 2000

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The model presented in this paper is a particular case of the principal-agent problem. An entrepreneur has an investment project whose returns depend on his effort, which is not observable by the financier. After determining the optimal contract that is used to finance such a project, I show that this contract can be replicated by a unique combination of debt and equity, which proves the optimality of these financial instruments.

JEL Classification: D82, G32

Suggested Citation

Santos, João A. C., Debt and Equity as Optimal Contracts. Journal of Corporate Finance Vol. 3, pp. 355-366, 1997, Available at SSRN:

João A. C. Santos (Contact Author)

Federal Reserve Bank of New York ( email )

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