Work

Dynamic financial contracting with persistent private information

Year: 2019

Type: article

Abstract: We study a dynamic agency model where the agent privately observes the firm's cash flows that are subject to persistent shocks. We characterize the policy dynamics and implement the optimal contract by financial securities. Because bad performance distorts investors' beliefs downward, the agent has less incentive to misrepresent information. The agent's compensation is less than what he can divert and is convex in performance. As private information becomes more persistent, (i) the agent is compensated more by stock options; (ii) firm credit limits vary more with history, dropping after bad performance; (iii) the firm is financially constrained for longer time.

Source: The RAND Journal of Economics

DOI: 10.1111/1756-2171.12275

Authors: Shiming Fu, R. Vijay Krishna

Institutions: Shanghai University of Finance and Economics, Florida State University

Language: English

Topic: Corporate Finance and Governance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W3024299093

FWCI: 1.913

Cites: 49

Cited by: 16

Related to: 10