SSE/EFI Working Paper Series in Economics and Finance
Expropriation Risk, Governance Control and Equilibrium Financial Contract
Abstract: We present a model of financial contracting in the
presence of asymmetric information between entrepreneur and investor.
Either liquidation threat or governance control can be used to protect
investor’s interests against expropriation risk. The two parties first
agree to a financial arrangement which assigns to the parties the
”governance right” to choose the level of governance control and the
”contracting right” to design the financing contract. We show the trade-off
between costs of liquidation and governance control determines the
equilibrium. In Pareto-efficient equilibrium financial arrangements, a
highly profitable project is financed by a contract which relies on
liquidation threat so that liquidation occurs with a strictly positive
probability. On the other hand, a less profitable project relies on
governance control, thereby avoiding liquidation altogether. We relate
different equilibrium financial arrangements to the ownership and financial
structure of firm.
Keywords: Asymmetric information; liquidation; governance control; (follow links to similar papers)
JEL-Codes: D82; G32; (follow links to similar papers)
26 pages, April 1997
Before downloading any of the electronic versions below
you should read our statement on
for viewing Postscript files and the
Acrobat Reader for viewing and printing pdf files.
Full text versions of the paper:
hastef0166.ps PostScript file (397kB)
hastef0166.ps.zip PKZipped PostScript (175kB)
hastef0166.pdf.zip (zipped) (243kB)
Questions (including download problems) about the papers in this series should be directed to Helena Lundin ()
Report other problems with accessing this service to Sune Karlsson ()
or Helena Lundin ().
Design by Joachim Ekebom