Optimal financing for growth firms

Nisan Langberg*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


We analyze the optimal contract to finance the series of investments of a growing firm. The analysis is based on the need to repeatedly raise funds when informed insiders can expropriate outside investors. The optimal contract can be implemented by a sequence of one-period debt contracts and equity ownership by outsiders. Debt is optimal, as it reduces the expected cost of auditing, while partial equity ownership by insiders is optimal, as it mitigates the need for auditing in the presence of valuable growth opportunities. The model yields time-series implications regarding capital structure, investment and its fraction financed externally, and profitability.

Original languageEnglish
Pages (from-to)379-406
Number of pages28
JournalJournal of Financial Intermediation
Issue number3
StatePublished - Jul 2008
Externally publishedYes


  • Capital structure
  • Dynamic contracts
  • External equity
  • Growth firms
  • Optimal contracts
  • Security design


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