We consider project financing under adverse selection and moral hazard and derive several interesting results. First, we provide an explanation of why good firms issue both debt and underpriced equity (even if the bankruptcy and agency costs of debt are zero). Second, we show that, in the presence of moral hazard, adverse selection may induce the conversion of negative into positive NPV project...

This paper provides causal evidence of flexible operating strategies affecting capital structure of firms. I exploit the appealing setting of the European labor market to show that the use of employment contracts that provide firms with a greater operating flexibility in terms of less costly firing promotes debt financing. I build the identification strategy on the exogenous inter-temporal and ...

This paper provides a theory to analyze the consequences of financing constraints for firm characteristics such as investment, profitability, leverage, the fraction of external equity, the probability of default and the cost of capital. This theory is based on the effects of future investment opportunities and the legal protection of investors on entrepreneurs’ incentives to divert funds to the...

We develop a model that endogenizes dynamic financing, investment, and cash retention/payout policies in order to analyze the effect of financial flexibility on firm value. We show that the value of financing flexibility depends on the costs of external financing, the level of corporate and personal tax rates which determine the effective cost of holding cash, the firm’s growth potential and it...

From the view of current conditions and developing trends of the debt scale in Chinese local government, the debt crisis will explode in the near future if it cannot be controlled in an effective way. According to the regional distribution in China, except for Beijing, Shanghai, Tianjin, and Hainan, the debt risk is mainly concentrated in the western region. In a further step, it can be seen th...

This paper sets out to explore the potential of sub-sovereign bonds in financing infrastructure in developing countries. Taking into account the historical experience of the US, it develops a supply and demand side framework for analysis of the market for sub-sovereign bonded debt in developing countries and applies this framework to Mexico, India and South Africa. Finally, it draws lessons for...