Moral Hazard and Adverse Selection: The Question of Financial Structure
Moral Hazard and Adverse Selection: The Question of Financial Structure
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道德风险与逆向选择:金融结构问题
DOI:
10.1111/j.1540-6261.1986.tb05051.x
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发表时间:
1986
影响因子:
8
通讯作者:
N. Stoughton
中科院分区:
文献类型:
--
作者:
M. Darrough;N. Stoughton
This paper looks at the moral hazard and adverse selection problems confronting an entrepreneur offering securities to an uninformed, but competitive financial market. The adverse selection aspect of the problem is generated by the unobservable entrepreneur's ability to transform effort into value. Moral hazard arises because the investment decision is made subsequent to financing. We consider the joint use of both debt and equity, and characterize the equilibrium relation between capital structure and unobservable attributes. It is shown that: (1) investment and financing are not separable; (2) there is an underinvestment problem for "better" firms; and (3) simultaneous use of both debt and equity can resolve this difficulty. We also establish a connection between expected terminal firm value and debt-promised payment level and between share retention and standard deviation. AGENCY PROBLEMS IN CORPORATE finance originated with the influential papers of Jensen and Meckling [11], Myers [17], Ross [21], and Leland-Pyle [14]. They show that the market imperfections induced by unobservable actions, lack of contracting ability, and information asymmetry generally lead to second-best outcomes in which the distribution of corporate ownership is achieved only at significant cost. These costs take the form of excessive perquisite consumption, overinvestment, underinvestment, and incomplete diversification of personal investment portfolios. Moral hazard and adverse selection comprise two forms in which agency problems may take shape. Arrow [1] equates these two terms with hidden action and hidden information, respectively. Moral hazard arises when the action undertaken by the agent is unobservable and has a differential value to the agent as compared to the principal. Adverse selection problems arise when the agent has more information than the principal. The resolution of such difficulties has been explored in a number of contexts with both signals and contingent contracting mechanisms. These definitions exclude certain agency problems in the delegation literature for which the preference incongruity results from a lack of precommitment rather than some exogenous feature of the model. In corporate finance, one would thus identify the Jensen-Meckling paper with moral hazard because perquisites enter the insider's objective differently from outsiders, while * Darrough is from Columbia University and Stoughton is from the University of California, Irvine. The second author's research was partially supported by Grant Number 410-83-0786 R-1 from the Social Sciences and Humanities Research Council of Canada. This paper was presented at the 1984 meetings of the Western Finance Association in Vancouver and at the 1985 European Finance Association meetings in Bern. We thank Kose John and Frans Tempelaar for their comments at the meetings.