An Economic Analysis of Financial Structure - How Moral Hazard Affects the Choice between Debt and Equity Contracts
3 important questions on An Economic Analysis of Financial Structure - How Moral Hazard Affects the Choice between Debt and Equity Contracts
What is Moral Hazard in Debt and Equity Contracts?
asymmetric information problem that occurs after a financial transaction, when the seller of a security may have the incentive to hide information and step into activities that are undesirable for the buyer of the security
How is Moral hazard called in equity contracts?
Called the Principal-Agent Problem:
• Principal: less information (stockholder)
• Agent: more information (manager)
• Principal: less information (stockholder)
• Agent: more information (manager)
How is the principle-agent problem created?
Separation of ownership and control of the firm
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