Financing entrepreneurial production: Security design with flexible information acquisition

Published

Journal Article

© The Author(s) 2018. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please e-mail: journals.permissions@oup.com. We propose a theory of security design in financing entrepreneurial production, positing that the investor can acquire costly information on the entrepreneur's project before making the financing decision. When the entrepreneur has enough bargaining power in security design, the optimal security helps incentivize both efficient information acquisition and efficient financing. Debt is optimal when information is not very valuable for production, whereas the combination of debt and equity is optimal when information is valuable. If, instead, the investor has sufficiently strong bargaining power in security design or can acquire information only after financing, equity is optimal.

Full Text

Duke Authors

Cited Authors

  • Yang, M; Zeng, Y

Published Date

  • January 1, 2019

Published In

Volume / Issue

  • 32 / 3

Start / End Page

  • 819 - 863

Electronic International Standard Serial Number (EISSN)

  • 1465-7368

International Standard Serial Number (ISSN)

  • 0893-9454

Digital Object Identifier (DOI)

  • 10.1093/rfs/hhy084

Citation Source

  • Scopus