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