Citation

Discussion Paper Details

Please find the details for DP9923 in an easy to copy and paste format below:

Full Details

Title: Preserving "Debt Capacity" or "Equity Capacity": A Dynamic Theory of Security Design under Asymmetric Information

Author(s): Roman Inderst and Vladimir Vladimirov

Publication Date: April 2014

Keyword(s): Asymmetric Information, Capital Structure, Dynamic Security Design and Venture Capital Financing

Programme Area(s): Financial Economics

Abstract: In a dynamic model of optimal security design, we show when firms should preserve "equity capacity" through choosing high target leverage or "debt capacity" through choosing low target leverage. Thereby, firms reduce a problem of underinvestment or overinvestment when they must raise future financing under asymmetric information. Which problem arises depends on whether additional financing is raised at competitive terms or whether there is a lock-in with initial investors. Firms initial (or target) capital structure matters as it affects the "outside option" of both insiders and outside investors. Our theory also entails implications for start-up and venture capital financing.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9923

Bibliographic Reference

Inderst, R and Vladimirov, V. 2014. 'Preserving "Debt Capacity" or "Equity Capacity": A Dynamic Theory of Security Design under Asymmetric Information'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9923