This paper develops a principal-agent model of financial contracting in which optimal contracts resemble a combination of debt and equity. When defaulting on debt, the firm is punished by disruption of external funding. Such contracts however, invite rivals to compete more aggressively to...

This paper develops a principalagent model of nancial contracting in which optimalcontracts resemble a combination of debt and equity. When defaulting on debt, therm is punished by disruption of external funding. Such contracts however, inviterivals to compete more aggressively to increase the...