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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26615
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| Title: | Internal vs. External Financing: An Optimal Contracting Approach |
| Authors: | Inderst, Roman
Müller, Holger M. |
| Keywords: | Financial contracting
internal capital markets
theory of the firm |
| Issue Date: | Dec-2001 |
| Series/Report no.: | FIN-01-062 |
| Abstract: | This paper compares optimal financial contracts with centralized and
decentralized firms. Under centralized contracting headquarters raises
funds on behalf of multiple projects and then allocates the funds on the
firm’s internal capital market. Under decentralized contracting
each project raises funds separately on the external capital market. The
benefit of centralization is that headquarters can use excess liquidity
from high-cash flow projects to buy continuation rights for low
cash-flow projects. This allows headquarters to make greater repayments
to investors, which eases financing constraints ex ante. The cost is
that headquarters may pool cash flows from several projects, thereby
accumulate internal funds, and make follow-up investments without having
to return to the capital market. Absent any capital market discipline,
however, it is more difficult for investors to force headquarters to pay
out funds, which tightens ex-ante financing constraints. |
| URI: | http://hdl.handle.net/2451/26615 |
| Appears in Collections: | Economics Working Papers
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