Venture capital (VC) often involves complex equity contracts with so-called preferential rights affecting the allocation of exit proceeds among different share classes and investors. We structure exit-relevant preferential rights in a two-dimensional framework and develop a contingent claims...

We analyze corporate financial policies in leveraged buyouts (LBOs) in the presence of default risk. Our model captures the LBO-specific stepwise debt reduction, either with predetermined or cash-flow dependent (cash sweep) principal payments, and thus allows for dynamic redemption. These...

The internal rate of return (IRR) is still a widespread criterion for investment decisions, although many pitfalls are well known. This paper provides evidence for another, more fundamental, dark side of IRR: Based on a dynamic model of optimal capital structure with endogenous bankruptcy...