tcf-set1-princetonuniversitypress.pptVIP

* DETERMINANTS OF DEBT CAPACITY 1st set of transparencies for ToCF Adam Smith 1776 - Berle-Means 1932 Agency problem Agent insiders/managers/entrepreneur Principal outsiders/investors/lenders INTRODUCTION I. 2. Inefficient investment ? Pet projects. ? Empire building. 1. Insufficient ‘‘effort’’ 2. Inefficient investment 3. Entrenchment strategies 4. Private benefits Good governance: 1 selects most able managers 2 makes them accountable to investors INTRODUCTION I. 1. Micro Basics: a one-stage financing: fixed and variable investment models; b applications: debt overhang, diversification, collateral pledging, redeployability of assets. Multistage financing: liquidity ratios, soft budget constraint, free cash flow. Financing under asymmetric information. Exit and voice in corporate governance. Control rights. OUTLINE Approach: controlled experiment Topics: 2. Macro Dual role of assets and multiple equilibria. Credit crunch. Liquidity shortages. Liquidity premia and pricing of assets. Political economy of corporate finance. Project costs I. Has cash A I. BASICS OF CREDIT RATIONING: FIXED INVESTMENT MODEL Lenders / investors /outsiders Entrepreneur / borrower / insider II. Key question: Can lenders recoup their investment? ? Risk neutral entrepreneur has one project, needs outside financing. TYPICAL MODEL Want to induce good behavior: and Contract: Success: Failure: 0 each optimal . Rb + R? R. Reward Rb in case of success Necessary and sufficient condition for financing Minimum equity: or PLEDGEABLE INCOME ? INVESTORS’ OUTLAY Remarks 1 Entrepreneur receives NPV 2 Reputational capital / scope for diversion shortcut Will always be the case with competitive financial market. A increases with B. Note : Courts can help reduce B 3 Investors’ claim: debt or equity? At least two interpretations: inside equity + outside debt R? to be reimbursed ; all-equity firm: shares No longer true if leftover value in case of failure. In a