financialcontracting-上海财经大学金融学院.doc

Financial Contracting Oliver Hart Harvard Institute of Economic Research Discussion Paper Number 1924 Harvard University [October 2000, Revised April 2001] “Financial Contracting” might be described as the theory of what kinds of deals are made between financiers and those who need financing. Two questions: (A) Suppose an entrepreneur has an idea but no money and an investor has money but no idea. How will it be financed? (B) We see companies around the world with a wide variety of financial structures. Why? Questions like these have been the focus of much of the very large corporate finance literature that has developed over the last forty years, and they have also been studied in the more recent financial contracting literature. I. Established Views of Financial Structure The modern Corporate Finance literature starts with the famous Modigliani and Miller (MM) theorem (Franco Modigliani and Merton Miller (1958)): In an ideal world, where there are no taxes, incentive or information problems, the way a project or firm is financed doesn’t matter. 1. Incentive (Agency) Problems The most famous incentive paper in the corporate finance literature is Michael Jensen and William Meckling (1976). Jensen and Meckling argue that the value of the firm or project V is not fixed, as MM assume: rather it depends on the actions of management, specifically their consumption of “non-pecuniary benefits” (perks). Perks refer to things like fancy offices, private jets, the easy life, etc. These benefits are attractive to management but are of no interest to shareholders–in fact they reduce firm value. Moreover, it is reasonable to assume that they are inefficient in the sense that one dollar of perks reduces firm value by more than a dollar. Jensen and Meckling use these ideas to develop a trade-off between debt and equity finance. Consider a manager (or entrepreneur) who initially owns 100 percent of a firm. This manager will choose not to consume perks since each dollar of perks