Soft budget constraint and stock price information

Faure-Grimaud, Antoine (1996) Soft budget constraint and stock price information. Financial Markets Group Discussion Papers (251). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

This article investigates the ability of regulatory agencies to keep firms to fixed budgets. The budget implemented at an interim date is always superior to the one efficient ex ante, since, at the interim stage, regulators do not internalize the disincentive effect of their intervention on firm's effort. Budget constraints are more or less soft according to the information available to regulators. The ability of financial markets to generate information is endogenized. It is shown that stock price information may increase the softness of the budget constraint, decrease firms' incentives to exert effort and may reduce social welfare. It also appears that the "softness" of these constraints depends on the type of claims used to finance initial investments. A straightforward application of the model sheds light on the privatisation decision.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 1996 The Author(s)
Divisions:	Economics
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure L - Industrial Organization > L5 - Regulation and Industrial Policy > L51 - Economics of Regulation
Date Deposited:	23 Jun 2023 08:45
Last Modified:	16 Sep 2023 00:03
URI:	http://eprints.lse.ac.uk/id/eprint/119157

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