A Theory of Outside Equity: Financing Multiple Projects

22 Pages Posted: 21 Feb 2019

See all articles by Spiros Bougheas

Spiros Bougheas

University of Nottingham - School of Economics

Tianxi Wang

University of Essex - Department of Economics

Date Written: 2019

Abstract

In the financial economics literature debt contracts provide efficient 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 that, depending on the distribution of the quality shock, the optimal financial contract can be either debt or equity.

Keywords: outside equity, financial contracts, principal agent model

JEL Classification: G300, D860

Suggested Citation

Bougheas, Spiros and Wang, Tianxi, A Theory of Outside Equity: Financing Multiple Projects (2019). CESifo Working Paper No. 7466. Available at SSRN: https://ssrn.com/abstract=3338820

Spiros Bougheas (Contact Author)

University of Nottingham - School of Economics ( email )

University Park
Nottingham, NG7 2RD
United Kingdom

Tianxi Wang

University of Essex - Department of Economics ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

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