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| Author: | Inderst, R. Müller, H. M. |
| Title: | Internal versus external financing: an optimal contracting approach |
| Journal: | Journal of Finance
2003 : JUN, VOL. 58:3, p. 1033-1062 |
| Index terms: | Capital markets Organizational behaviour Contracts Optimization |
| Language: | eng |
| Abstract: | The authors study financial contracting for centralized and decentralized firms. Under centralized contracting, headquarters raises funds on behalf of multiple projects. Under decentralized contracting, each project raises funds separately on the external capital market. The benefit of centarlization is that headquarters can use excess liquidity from high cash-flow projects to buy continuation rights for low cash-flow projects. The cost is that headquarters can use excess liquidity from high cash-flow projects to buy continuation rights for low cash-flow projects. The cost is that headquarters may pool cash flows from several projects and self-finance follow-up investments without having to return to the capital market. |
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