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Dynamic Theories about Financing Contracts. A Review of the Literature
Eva Ropero |
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In this paper, we review the literature on long-term dynamic financing contracts between a lender and an entrepreneur and the resulting interaction between the financing and investment decisions of the firms. There are two main lines of investigation. On one hand some papers have analyzed the existence of financing constraints, their origins and their effects on the evolution of the firms. The most recent work in this area explains the appearance of financing constraints by means of long-term optimal financing contracts in the presence of information asymmetry or limited enforcement problems. On the other hand, various studies have analyzed the effect of ex-post renegotiation of optimal contracts. In this line of investigation some papers have studied the feasibility of firm liquidation in the presence of costless renegotiation, while others have focused on how renegotiation could be useful for debt holders, even if they give more rights to debtors.
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