Business, Management and Accounting
3 years ago

New theory revolutionizes financing for multiple projects, impacting corporate governance.

Journal of Corporate Finance
A theory of outside equity: Financing multiple projects
Spiros Bougheas, Tianxi Wang

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Managers Exploit Insider Info to Enrich Themselves at Shareholders' Expense

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Optimal contracts distorted, leading to inefficient bonus rewards in agency model.

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Debt contracts are often used to solve problems with managers taking advantage of their position. This study looks at situations where a manager knows more about a project's quality after agreeing to a contract with investors. The success of each project depends on its quality and the effort put in by the manager. The best financial contract in these cases involves the investor having a share of the project's equity. This model helps with issues in finance and how companies are run.