We consider firm financing when the firm quality is private information of the manager and, given its inherent quality, the project viability depends on the manager exerting unobservable effort. We show that capital structure matters even though managerial contracts are optimally designed. Good...

We consider project financing when the project quality is private information of the manager and, given its inherent quality, the project viability depends on the manager exerting unobservable effort. We show that capital structure matters even though managerial contracts are optimally designed....

We consider a model of external financing in which privately informed entrepreneurs seek funds from competitive financiers. The literature restricts attention to monotonic securities and finds that straight debt is the uniquely optimal. Monotonicity is justified by the argument that it would...