@article{727ed3b13b084483a1c99819073fdb32,
title = "Optimal vs. traditional securities under moral hazard",
abstract = "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.",
author = "Robe, {Michel A.}",
note = "Funding Information: School of Business, University of Miami, Coral Gables, FL 33124-6552. The author is very grateful to J. Boyd, P. Faynzilberg, H. Robe, R. Singh, and an anonymous referee for very detailed comments and many insights. Many thanks also go to F. Allen, S. Bhattacharyya, R. Green, D. Mauer, P.-A. Michel, S. Pallage, and C. Spatt for very helpful suggestions on earlier drafts. I thank T. Burch, P. Fishe, P. Kumar, I. {\"O}tker, R. Rodriguez, A. Thakor, N. Wallace, and seminar participants at Carnegie Mellon, Georgetown, George Washington, UQAM, Miami, and the 1996 Meeting of the Western Finance Association for useful comments. This paper was supported by a McLamore Summer grant. It builds on a chapter of the author{\textquoteright}s dissertation at Carnegie Mellon. The usual disclaimer applies. 1See Allen and Gale ((1994), chapter 2) and the references cited therein.",
year = "1999",
month = jun,
doi = "10.2307/2676277",
language = "English (US)",
volume = "34",
pages = "161--189",
journal = "Journal of Financial and Quantitative Analysis",
issn = "0022-1090",
publisher = "Cambridge University Press",
number = "2",
}