Abstract

By committing to terminate funding if a firm's performance is poor, investors can mitigate managerial incentive problems. These optimal financial constraints,however, encourage rivals to ensure that a firm's performance is poor; this raises the chance that the financial constraints become binding and induce exit. We analyze the optimal financial contract in light of this predatory threat. The optimal contract balances the benefits of deterring predation by relaxing financial constraints against the cost of exacerbating incentive problems. (JEL 610)

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Citation

Bolton, Patrick, and David Scharfstein. "A Theory of Predation Based on Agency Problems in Financial Contracting." American Economic Review 80, no. 1 (March 1990): 93-106.

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