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Financing Entrepreneurial Production: Security Design with Flexible Information Acquisition

Yang, M; Zeng, Y; (2019) Financing Entrepreneurial Production: Security Design with Flexible Information Acquisition. The Review of Financial Studies , 32 (3) pp. 819-863. 10.1093/rfs/hhy084. Green open access

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Abstract

We propose a theory of security design in financing entrepreneurial production, positing that the investor can acquire costly information on the entrepreneur’s project before making the financing decision. When the entrepreneur has enough bargaining power in security design, the optimal security helps incentivize both efficient information acquisition and efficient financing. Debt is optimal when information is not very valuable for production, whereas the combination of debt and equity is optimal when information is valuable. If, instead, the investor has sufficiently strong bargaining power in security design or can acquire information only after financing, equity is optimal

Type: Article
Title: Financing Entrepreneurial Production: Security Design with Flexible Information Acquisition
Open access status: An open access version is available from UCL Discovery
DOI: 10.1093/rfs/hhy084
Publisher version: http://dx.doi.org/10.1093/rfs/hhy084
Language: English
Additional information: This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions.
Keywords: D82 - Asymmetric and Private Information; Mechanism DesignD86 - Economics of Contract: TheoryG24 - Investment Banking; Venture Capital; Brokerage; Ratings and Ratings AgenciesG32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; GoodwillL26 - Entrepreneurship
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL BEAMS
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science > UCL School of Management
URI: https://discovery.ucl.ac.uk/id/eprint/10104739
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