Optimal financial contracting and the effects of firm size
This seminar will be led by Professor Sandro Brusco from Stony Brook University, New York.
In this seminar, Professor Sandro Brusco will present his research paper considering the design of optimal dynamic financing for a firm subject to moral hazard problems.
With respect to the existing literature, he enriches the model by introducing durable capital. The existence of durable capital allows for analysis of the role of firm's size, separately from age and financial structure.
Professor Brusco finds that a higher level of capital decreases the probability of liquidation, increases future size and reduces the average return and volatility on the assets of the firm. Although analytical results are not available, he shows through simulations that the rate of growth of capital is decreasing with size and that the variability of the rate of growth has an inverse U shape, meaning that it first increases with size and eventually it declines. The results are broadly in agreement with the empirical results on the effects of firm size.