A Theory of Debt Maturity and Innovation

Arbeitspapier

I propose a theory of debt maturity as an incentive device to motivate innovation when contracts are fundamentally incomplete and shaped by ex-post renegotiation. The financing of innovative firms must balance two goals. On the one hand, since innovation is inherently risky, the entrepreneur must receive adequate protection after failure. Simultaneously, the firm must be liquidated when its assets can be redeployed more efficiently elsewhere. Meeting these two goals can be especially challenging when contracts are incomplete. I show how an appropriate choice of debt maturity, together with ex-post contract renegotiation, embeds a "put option" into the firm's capital structure. The put is exercised when liquidation is efficient, and it partially insures the entrepreneur against failure and thus motivates innovation. The theory has novel empirical implications for the financing patterns of innovative firms.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECONtribute Discussion Paper ; No. 050

Classification and Topics

• Classification: Wirtschaft ; Bargaining Theory; Matching Theory ; Asymmetric and Private Information; Mechanism Design ; Economics of Contract: Theory ; Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill ; Bankruptcy; Liquidation ; Innovation and Invention: Processes and Incentives ; Management of Technological Innovation and R&D
• Subject: Innovation ; Debt maturity ; Incomplete contracts ; Renegotiation

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Mitkov, Yuliyan
• Event: Veröffentlichung
• (who): University of Bonn and University of Cologne, Reinhard Selten Institute (RSI)
• (where): Bonn and Cologne
• (when): 2020

Further information

• Handle: http://hdl.handle.net/10419/228853
• Last update: 10.03.2025, 11:41 AM CET