Firms, Contracts, and Financial Structure

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Clarendon Press, Oct 5, 1995 - Business & Economics - 240 pages
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This book provides a framework for thinking about economic instiutions such as firms. The basic idea is that institutions arise in situations where people write incomplete contracts and where the allocation of power or control is therefore important. Power and control are not standard concepts in economic theory. The book begins by pointing out that traditional approaches cannot explain on the one hand why all transactions do not take place in one huge firm and on the other hand why firms matter at all. An incomplete contracting or property rights approach is then developed. It is argued that this approach can throw light on the boundaries of firms and on the meaning of asset ownership. In the remainder of the book, incomplete contacting ideas are applied to understand firms' financial decisions, in particular, the nature of debt and equity (why equity has votes and creditors have foreclosure rights); the capital structure decisions of public companies; optimal bankruptcy procedure; and the allocation of voting rights across a company's shares. The book is written in a fairly non-technical style and includes many examples. It is aimed at advanced undergraduate and graduate students, academic and business economists, and lawyers as well as those with an interest in corporate finance, privatization and regulation, and transitional issues in Eastern Europe, the former Soviet Union, and China. Little background knowledge is required, since the concepts are developed as the book progresses and the existing literature is fully reviewed.

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Part I Understanding Firms
1 Established Theories of the Firm
2 The Agency View
3 Transaction Cost Theories
2 The Property Rights Approach
2 A Formal Model of the Costs and Benefits of Integration
3Simple Things the Theory Can Tell Us About the World
6Related Work
6 Capital Structure Decisions of a Public Company
1Introduction to the Models
2Model 1
3Model 2
4Model 3
5Observed Patterns of Capital Structure

3 Further Issues Arising from the Property Rights Approach
2Worker Incentives
3Delegation and Other Forms of Intermediate Ownership
4Residual Control versus Residual Income
5The Effects of Reputation
6Investments in Physical Capital
7Formation of Assets
8Integration Information Dissemination and CoOperation
4 A Discussion of the Foundations of the Incomplete Contracting Model
2Discussion of the Property Rights Model of Chapter 2
3More on the Role of the HoldUp Problem
AppendixMessageDependent Ownership Structures
1 M1 and M2 Have Both Invested
2M1 Has not Invested M2 Has Invested
4 Neither M1 Nor M2 Has Invested
Part II Understanding Financial Structure
5 Theories of Financial Contracting and Debt
1The AghionBolton Model
2A Diversion Model Based on Hart and Moore 1989
3A MultiPeriod Model
4The Case of Uncertainty
5Multiple Investors and Hard Budget Constraints
6Other Theories of Capital Structure
7 Bankruptcy Procedure
1The Need for a Formal Bankruptcy Procedure
2Goals of a Bankruptcy Procedure
3Existing Procedures
4An Alternative Procedure
Version 1
Version 2
5An Assessment
6Further Considerations
7Concluding Remarks
8 The Structure of Voting Rights in a Public Company
An Example
2The Model
The Control Contest

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About the author (1995)

Oliver Hart has written for the Wall Street Journal and the Financial Times as well as contributing to numerous refereed journals. He is currently a member of the Econometric Society and has taught at Harvard, the LSE, MIT, Exeter and Cambridge Universities among others.

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