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- Publisher Website: 10.1093/jeea/jvy026
- Scopus: eid_2-s2.0-85065312896
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Article: The commitment role of equity financing
Title | The commitment role of equity financing |
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Authors | |
Issue Date | 2019 |
Citation | Journal of the European Economic Association, 2019, v. 17, n. 4, p. 1232-1260 How to Cite? |
Abstract | Existing theories of a firm’s optimal capital structure seem to fail in explaining why many healthy and profitable firms rely heavily on equity financing, even though benefits associated with debt (like tax shields) appear to be high and the bankruptcy risk low. This holds in particular for firms that show a strong commitment toward their workforce and are popular among employees. We demonstrate that such financing behavior may be driven by implicit arrangements made between a firm and its managers/employees. Equity financing generally strengthens a firm’s credibility to honor implicit promises. Debt, however, has an adverse effect on the enforceability of these arrangements because too much debt increases the firm’s reneging temptation, as some of the negative consequences of breaking implicit promises can be shifted to creditors. Our analysis provides an explanation for why some firms only use little debt financing. Predictions made by our theory are in line with a number of empirical results, which seem to stay in contrast to existing theories on capital structure. |
Persistent Identifier | http://hdl.handle.net/10722/351389 |
ISSN | 2023 Impact Factor: 3.9 2023 SCImago Journal Rankings: 6.658 |
DC Field | Value | Language |
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dc.contributor.author | Fahn, Matthias | - |
dc.contributor.author | Wamser, Georg | - |
dc.contributor.author | Merlo, Valeria | - |
dc.date.accessioned | 2024-11-20T03:55:59Z | - |
dc.date.available | 2024-11-20T03:55:59Z | - |
dc.date.issued | 2019 | - |
dc.identifier.citation | Journal of the European Economic Association, 2019, v. 17, n. 4, p. 1232-1260 | - |
dc.identifier.issn | 1542-4766 | - |
dc.identifier.uri | http://hdl.handle.net/10722/351389 | - |
dc.description.abstract | Existing theories of a firm’s optimal capital structure seem to fail in explaining why many healthy and profitable firms rely heavily on equity financing, even though benefits associated with debt (like tax shields) appear to be high and the bankruptcy risk low. This holds in particular for firms that show a strong commitment toward their workforce and are popular among employees. We demonstrate that such financing behavior may be driven by implicit arrangements made between a firm and its managers/employees. Equity financing generally strengthens a firm’s credibility to honor implicit promises. Debt, however, has an adverse effect on the enforceability of these arrangements because too much debt increases the firm’s reneging temptation, as some of the negative consequences of breaking implicit promises can be shifted to creditors. Our analysis provides an explanation for why some firms only use little debt financing. Predictions made by our theory are in line with a number of empirical results, which seem to stay in contrast to existing theories on capital structure. | - |
dc.language | eng | - |
dc.relation.ispartof | Journal of the European Economic Association | - |
dc.title | The commitment role of equity financing | - |
dc.type | Article | - |
dc.description.nature | link_to_subscribed_fulltext | - |
dc.identifier.doi | 10.1093/jeea/jvy026 | - |
dc.identifier.scopus | eid_2-s2.0-85065312896 | - |
dc.identifier.volume | 17 | - |
dc.identifier.issue | 4 | - |
dc.identifier.spage | 1232 | - |
dc.identifier.epage | 1260 | - |
dc.identifier.eissn | 1542-4774 | - |