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Financing Entrepreneurial Production: Security Design with Flexible Information Acquisition

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  • Ming Yang
  • Yao Zeng

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.Received October 12, 2015; editorial decision February 10, 2018 by Editor Itay Goldstein.

Suggested Citation

  • Ming Yang & Yao Zeng, 2019. "Financing Entrepreneurial Production: Security Design with Flexible Information Acquisition," The Review of Financial Studies, Society for Financial Studies, vol. 32(3), pages 819-863.
    • Handle: RePEc:oup:rfinst:v:32:y:2019:i:3:p:819-863.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhy084
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    Citations

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    Cited by:

    1. Lindbeck, Assar & Weibull, Jörgen, 2020. "Delegation of investment decisions, and optimal remuneration of agents," European Economic Review, Elsevier, vol. 129(C).
    2. Dong, Feng & Jia, Yandong & Wang, Siqing, 2022. "Speculative Bubbles and Talent Misallocation," Journal of Economic Dynamics and Control, Elsevier, vol. 141(C).
    3. Cai, Zhifeng & Dong, Feng, 2023. "Public disclosure and private information acquisition: A global game approach," Journal of Economic Theory, Elsevier, vol. 210(C).
    4. Oleg Muratov, 2023. "Entrepreneur–Investor Information Design," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(4), pages 1431-1467, November.
    5. Siciliani, Paolo & Eccles, Peter, 2024. "Information disclosure and information acquisition in credit markets," Bank of England working papers 1067, Bank of England.
    6. Jan Starmans, 2023. "Technological Determinants of Financial Constraints," Management Science, INFORMS, vol. 69(5), pages 3003-3024, May.
    7. Miglo, Anton, 2022. "Theories of financing for entrepreneurial firms: a review," MPRA Paper 115835, University Library of Munich, Germany.
    8. Sergei Mikhalishchev & Vladimir Novak, 2024. "Inattention, Stability, and Reform Reluctance," Working and Discussion Papers WP 8/2024, Research Department, National Bank of Slovakia.
    9. Chaigneau, Pierre, 2023. "Capital Structure with Information about the Upside and the Downside," MPRA Paper 121397, University Library of Munich, Germany.
    10. Kim, Kyungmin & Koh, Youngwoo, 2022. "Auctions with flexible information acquisition," Games and Economic Behavior, Elsevier, vol. 133(C), pages 256-281.

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