Capital structure and seniority in entrepreneurial firms
We present a model of cash constrained entrepreneurs who need an investor to finance their project. Investors can either be uninformed, such as individual bondholders, or informed, such as venture capitalists and banks. There is an entrepreneurial moral hazard problem, which can be partially overcom...
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| Format: | Working paper |
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University of Oxford
2005
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| _version_ | 1797053549723516928 |
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| author | Ippolito, F |
| author_facet | Ippolito, F |
| author_sort | Ippolito, F |
| collection | OXFORD |
| description | We present a model of cash constrained entrepreneurs who need an investor to finance their project. Investors can either be uninformed, such as individual bondholders, or informed, such as venture capitalists and banks. There is an entrepreneurial moral hazard problem, which can be partially overcome through monitoring only by informed investors. However, monitoring is only effective if investors can commit ex ante to liquidate the project after observing a poor signal. We show that a capital structure that minimizes commitment and information costs requires informed investors to hold senior convertible debt, uninformed investors to hold junior debt and entrepreneurs to hold common stock. |
| first_indexed | 2024-03-06T18:45:20Z |
| format | Working paper |
| id | oxford-uuid:0e4e918c-d2b6-4ca9-b351-c4f076136724 |
| institution | University of Oxford |
| last_indexed | 2024-03-06T18:45:20Z |
| publishDate | 2005 |
| publisher | University of Oxford |
| record_format | dspace |
| spelling | oxford-uuid:0e4e918c-d2b6-4ca9-b351-c4f0761367242022-03-26T09:45:13ZCapital structure and seniority in entrepreneurial firmsWorking paperhttp://purl.org/coar/resource_type/c_8042uuid:0e4e918c-d2b6-4ca9-b351-c4f076136724Symplectic ElementsBulk import via SwordUniversity of Oxford2005Ippolito, FWe present a model of cash constrained entrepreneurs who need an investor to finance their project. Investors can either be uninformed, such as individual bondholders, or informed, such as venture capitalists and banks. There is an entrepreneurial moral hazard problem, which can be partially overcome through monitoring only by informed investors. However, monitoring is only effective if investors can commit ex ante to liquidate the project after observing a poor signal. We show that a capital structure that minimizes commitment and information costs requires informed investors to hold senior convertible debt, uninformed investors to hold junior debt and entrepreneurs to hold common stock. |
| spellingShingle | Ippolito, F Capital structure and seniority in entrepreneurial firms |
| title | Capital structure and seniority in entrepreneurial firms |
| title_full | Capital structure and seniority in entrepreneurial firms |
| title_fullStr | Capital structure and seniority in entrepreneurial firms |
| title_full_unstemmed | Capital structure and seniority in entrepreneurial firms |
| title_short | Capital structure and seniority in entrepreneurial firms |
| title_sort | capital structure and seniority in entrepreneurial firms |
| work_keys_str_mv | AT ippolitof capitalstructureandseniorityinentrepreneurialfirms |