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Equity or Debt? Contracts in Markets with Asymmetric Information

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  • Frederique Bracoud
  • Brian Hillier

Abstract

Four cases of a selection problem are examined where knowledge of the distributions from which project returns are drawn is private to entrepreneurs with projects. Diagrammatic analysis is used to determine the contract form offered by funding banks which choose between debt, equity or a more general contract. Two variants of the problem are novel. One new case indicates that some projects will receive equity finance and others debt finance, the other that the choice between debt or equity depends upon the level of the deposit interest rate. The efficiency of the level and composition of investment is examined.

Suggested Citation

  • Frederique Bracoud & Brian Hillier, 2000. "Equity or Debt? Contracts in Markets with Asymmetric Information," Manchester School, University of Manchester, vol. 68(1), pages 1-23, January.
    • Handle: RePEc:bla:manchs:v:68:y:2000:i:1:p:1-23
    DOI: 10.1111/1467-9957.00179
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    Cited by:

    1. A. Miglo, 2007. "A note on corporate taxation, limited liability, and asymmetric information," Journal of Economics, Springer, vol. 92(1), pages 11-19, September.

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