Robust Financial Contracting and Investment / Aifan Ling, Jianjun Miao, Neng Wang.

Format:

Book

Author/Creator:

Ling, Aifan.

Contributor:

National Bureau of Economic Research.

Miao, Jianjun.

Wang, Neng.

Series:

Working Paper Series (National Bureau of Economic Research) no. w28367.

NBER working paper series no. w28367

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2021.

Summary:

We study how investors' preferences for robustness influence corporate investment, financing, and compensation decisions and valuation in a financial contracting model with agency. We characterize the robust contract and show that early liquidation can be optimal when investors are sufficiently ambiguity averse. We implement the robust contract by debt, equity, cash, and a financial derivative asset. The derivative is used to hedge against the investors' concern that the entrepreneur may be overly optimistic. Our calibrated model generates sizable equity premium and credit spread, and implies that ambiguity aversion lowers Tobin's q; the average investment, and investment volatility. The entrepreneur values the project at an internal rate of return of 3.5% per annum higher than investors do.

Notes:

Print version record

January 2021.