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http://hdl.handle.net/2451/26694
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| Title: | Capital Structure Decisions in Small and Large Firms: A Life-cycle
Theory of Financing |
| Authors: | Fluck, Zsuzsanna |
| Keywords: | security design
nonveri¯ability of cash °ows
managerial moral hazard
control rights
maturity
maturity
maturity
capital structure |
| Issue Date: | 31-Jul-2000 |
| Series/Report no.: | FIN-00-028 |
| Abstract: | This paper focuses on the dynamic capital structure of firms: Why do
firms use very different financial contracts in different stages of
their life-cycles? In a model of optimal financial contracting, we
investigate whether firms' subsequent financing decisions are affected
by the outcome of their previous financing decisions. We find that the
initial and subsequent financing decisions of the same firm may lead to
different security choices. The firms' financing decisions will differ
in two respect. First, there will be equilibrium contracts that
investors would reject for some startup firm, but would accept for an
otherwise identical ongoing ¯rm (i.e. even when the two firms have
identical projects). Secondly, even the set of the equilibrium financial
contracts differs in different stages of the firm's lifecycle: some
contracts which are never sustainable as an initial contract but become
sustainable as a subsequent contract. The reason is the stage-dependency
of the control rights of subsequent claimholders: in addition to their
own rights, holders of subsequent security issues may also rely on the
firm's existing investors to enforce their claims. Whether or not they
can do so, depends on the priority structure of the claims. |
| URI: | http://hdl.handle.net/2451/26694 |
| Appears in Collections: | Finance Working Papers
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