Debt,equity, and information |
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| Institution: | 1. Université de Franche-Comté, CRESE, 30 Avenue de l’Observatoire, 25009 Besançon, France;2. Université de Saint-Etienne, CNRS UMR 5824 GATE Lyon Saint-Etienne, France;1. Department of Electrical Engineering, National Tsing Hua University, Hsinchu City, Taiwan;2. Department of Photonics & Display Institute, National Chiao Tung University, Hsinchu City, Taiwan;1. School of Economics, UNSW Australia, Sydney, NSW 2052, Australia;2. Business Intelligence and Smart Services Institute, Maastricht University, Maastricht, The Netherlands;1. Department of Physics and Institute of Theoretical Physics and Astrophysics, Xiamen University, Xiamen 361005, China;2. Institute of Electromagnetics and Acoustics; Department of Electronic Science, Xiamen University, Xiamen 361005, China;3. Fujian Provincial Key Laboratory of Theoretical and Computational Chemistry, Xiamen University, Xiamen 361005, China |
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| Abstract: | Most firms issue financial assets such as debt or equity (e.g. bonds or stock) to outside investors. While these financial assets differ greatly in their characteristics, their diversity has received little attention in the literature. Filling this important gap in the literature, this paper views debt and equity as financial contracts, and asks why they are optimal instead of other financial contracts. By endogenizing the bankruptcy process, this paper shows how debt and equity arise as a consequence of an optimal allocation of cash-flow rights and monitoring rights, and how equity leads to dividend signaling. |
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| Keywords: | Financial contracting Security design Debt and equity Monitoring Information asymmetry Renegotiation and bargaining |
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