Optimal Contracting, Corporate Finance, and Valuation with Inalienable Human Capital

65 Pages Posted: 2 Mar 2015

See all articles by Patrick Bolton

Patrick Bolton

Columbia Business School - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Neng Wang

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Jinqiang Yang

Shanghai University of Finance and Economics

Date Written: February 2015

Abstract

A risk-averse entrepreneur with access to a profitable venture needs to raise funds from investors. She cannot indefinitely commit her human capital to the venture, which limits the firm’s debt capacity, distorts investment and compensation, and constrains the entrepreneur’s risk-sharing. This puts dynamic liquidity and state-contingent risk allocation at the center of corporate financial management. The firm balances mean-variance investment efficiency and the preservation of financial slack. We show that in general the entrepreneur’s net worth is overexposed to idiosyncratic risk and underexposed to systematic risk. These distortions are greater the closer the firm is to exhausting its debt capacity.

Suggested Citation

Bolton, Patrick and Wang, Neng and Yang, Jinqiang, Optimal Contracting, Corporate Finance, and Valuation with Inalienable Human Capital (February 2015). NBER Working Paper No. w20979. Available at SSRN: https://ssrn.com/abstract=2572138

Patrick Bolton (Contact Author)

Columbia Business School - Department of Economics ( email )

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HOME PAGE: http://www0.gsb.columbia.edu/faculty/pbolton/

Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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European Corporate Governance Institute (ECGI)

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HOME PAGE: http://www.ecgi.org

Neng Wang

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jinqiang Yang

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

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