Authors
Patrick Bolton, David S Scharfstein
Publication date
1990/3/1
Journal
The American economic review
Pages
93-106
Publisher
American Economic Association
Description
By committing to terminate funding if a firm's performance is poor, investors can mitigate managerial incentive problems. These optimal financial constraints, however, encourage rivals to ensure that a firm's performance is poor; this raises the chance that the financial constraints become binding and induce exit. We analyze the optimal financial contract in light of this predatory threat. The optimal contract balances the benefits of deterring predation by relaxing financial constraints against the cost of exacerbating incentive problems.
Total citations
Scholar articles
P Bolton, DS Scharfstein - The American economic review, 1990