Optimal vs. traditional securities under moral hazard

Research output: Contribution to journalArticlepeer-review


This paper provides an explanation for the widespread use of traditional securities by well-established firms. Standard moral hazard models predict that equity, debt, and warrants are almost never optimal financing instruments. I show that issuing these securities is, nevertheless, nearly optimal: the issuer would gain very little by using non-traditional securities instead. Combined with equity, one debt issue (without multiple layers of seniority) and one warrant issue (without multiple exercise prices) suffice to achieve near optimality. The near optimality of traditional financing depends crucially on the issuer's ability to use warrants in addition to debt and equity.

Original languageEnglish (US)
Pages (from-to)161-189
Number of pages29
JournalJournal of Financial and Quantitative Analysis
Issue number2
StatePublished - Jun 1999
Externally publishedYes

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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