Disputes, debt, and equity

• 成果类型: Article
• 署名作者: Duncan, Alfred; Nolan, Charles
• 署名单位: University of Kent; University of Glasgow
• 刊物名称: THEORETICAL ECONOMICS
• ISSN/ISSBN: 1933-6837
• DOI: 10.3982/TE2574
• 发表日期: 2019-07-01
• 页码: 887-925
• 关键词: Microeconomics; costly state verification; external finance; leverage

摘要

We show how the prospect of disputes over firms' revenue reports promotes debt financing over equity. This is demonstrated in a costly state verification model with a risk-averse entrepreneur. The prospect of disputes encourages incentive contracts that limit penalties and avoid stochastic monitoring, even when the lender can commit to stochastic monitoring. Consequently, optimal contracts shift from equity toward standard debt. In short, when audit signals are weakly correlated with true incomes, standard debt contracts emerge as optimal; if audit signals are highly correlated with true incomes, optimal contracts resemble equity. When audit costs are sufficiently high, stochastic monitoring may be optimal. Optimal standard debt contracts under imperfect audits are shown to reproduce key empirical facts of U.S. firm borrowing.