lec7 - Econ 138 Financial and Behavioral Economics Lecture...

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
Econ 138 Financial and Behavioral Economics Lecture 7: Financing Constraints and Debt Overhang Ulrike Malmendier UC Berkeley Tu, February 12, 2008
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Admin / Organization Problem Set 1 Breakdown of points/students 21 41 81 91 10 1 11 1 18 2 19 2 20 1 21 3 22 4 24 27 ( Mean: 20 . 85 points)
Background image of page 2
Note : Seven people did not hand in the PS. Evaluated as 0 points. (Some of them may have dropped the class now.) Note (2) : This was meant to be an easy PS to ‘warm you up.’ If you have less than 12 points, this class is likely to become very, very di cult for you. If you have less than the mean, you need to work harder, too. Problem Set 2 Should be a good preparation for the f rst midterm (together with PS 1). Let’s go over it. NEWwrdslog inandpwd(o ldw i l lexp ireinMa rch) login: econ234 pwd: Econ234C Due: next Tuesday, 2/19, in class.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
1 Debt Overhang (continued) Debt Overhang = Situation in which a pro f table project (which would always be f nanced in the absence of previous claims) is not been f nanced due to ‘overhanging debt’ (previous claims). Can the model of credit-rationing explain this phenomenon? Version 1 (simple extension of the credit-rationing model) Firm has positive cash, C> 0 . Firm owes D to prior investors (from previous borrowing). Cash C is pledged to prior investors in case of default, and f rm cannot raise more funds without their consent.
Background image of page 4
Under what conditions would the project be f nanced if the f rm did not have previous debt? Answer : C C = I p H ( R B p H p L ) Under what conditions will the project not be f nanced given that the f rm does have previous debt? Answer : C D< C = I p H ( R B p H p L ) Intuition: Investors as a whole (prior + new) cannot recoup the cost of their investment ( I C ) plus previous debt D . Maximum net payo f available to new investors: p H ( R B p H p L ) D ( I C ) = C D C < 0
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Version 2 (Lack of Renegotiation) Investment project is very pro f tab le :wou
Background image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/02/2008 for the course ECON 138 taught by Professor Malmendier during the Spring '08 term at Berkeley.

Page1 / 19

lec7 - Econ 138 Financial and Behavioral Economics Lecture...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online