Finance Seminar with Igor Salitskiy, Stanford University
The Department of Finance is proud to announce the upcoming seminar withIgor Salitskiy, Stanford University.
Igor Salitskiy will present:
Abstract:
This paper extends the costly state verification model from Townsend [1979] toa dynamic and hierarchical setting with an investor, a financial intermediary, and anentrepreneur. Such a hierarchy is natural in a setting where the intermediary has specialmonitoring skills. This setting yields a theory of seniority and dynamic control: itexplains why investors are usually given the highest priority on projects' assets, financialintermediaries have middle priority and entrepreneurs have the lowest priority; it alsoexplains why more cash flow and control rights are allocated to financial intermediariesif a project's performance is bad and to entrepreneurs if it is good. I show that theoptimal contracts can be replicated with debt and equity. If the project requires aseries of investments until it can be sold to outsiders, the entrepreneur sells preferredstock (a combination of debt and equity) each time additional financing is needed. Ifthe project generates a series of positive payoffs, the entrepreneur sells a combinationof short-term and long-term debt.