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Capital Structure and Risk Management

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  • Karine Gobert

Abstract

This paper examines the impact of capital structure on the optimality of contingent financial contracts. The role of financial relationships is not only to provide funds but also to offer insurance to a risk adverse entrepreneur through contingent financial transfers. Since such financial relationships are long term, the question is on the depth of the financier's commitment to continue to offer financing in the future. If such a commitment cannot be obtained, insurance cannot be perfect. In that case, the entrepreneur chooses to complement outside insurance with internal financing. Depending on the financier's property rights on the firm's assets, the use of reserves can relax the financing constraints and considerably improve not only the level of insurance obtained through the contract but also the efficiency of investment decisions. This rationalizes the use of convertible debt in venture capital relationships. Cet article présente les impacts de la structure de capital sur l'optimalité des contrats financiers contingents. Le rôle des relations financières est non seulement de fournir des capitaux0501s aussi d'offrir de l'assurance à un entrepreneur riscophobe par des transferts contingents. Comme ces relations sont de longue durée, si le financier ne peut s'engager à toujours offrir du financement dans le futur, l'assurance ne peut pas être parfaite. Dans ce cas, l'entrepreneur choisit de complémenter l'assurance externe par du financement interne. Si le financier n'a pas tous les droits de propriété sur les réserves de la firme, l'utilisation des réserves internes peut relâcher les contraintes de refinancement externe et améliorer considérablement le niveau d'assurance ainsi que l'efficacité des décisions d'investissement. Ce résultat justifie l'usage de dette convertible dans les relations de capital risque.

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  • Karine Gobert, 2001. "Capital Structure and Risk Management," CIRANO Working Papers 2001s-51, CIRANO.
    • Handle: RePEc:cir:cirwor:2001s-51
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    File URL: https://cirano.qc.ca/files/publications/2001s-51.pdf
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    References listed on IDEAS

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    Cited by:

    1. Ricardo N. Bebczuk, 2004. "Explaining Dividend Policies in Argentina," IIE, Working Papers 050, IIE, Universidad Nacional de La Plata.
    2. Ricardo N. Bebczuk, 2005. "Corporate Governance and Ownership: Measurement and Impact on Corporate Performance and Dividend Policies in Argentina," Research Department Publications 3212, Inter-American Development Bank, Research Department.

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