Kostas Koufopoulos - Academia.edu (original) (raw)

Papers by Kostas Koufopoulos

Journal of Financial Economics, 2021

The version presented here is a Working Paper (or 'pre-print') that may be later published elsewh... more The version presented here is a Working Paper (or 'pre-print') that may be later published elsewhere.

Journal of Financial Economics, 2022

This paper revisits the problem of adverse selection in the insurance market of Rothschild and St... more This paper revisits the problem of adverse selection in the insurance market of Rothschild and Stiglitz [28]. We propose a simple extension of the game-theoretic structure in Hellwig [14] under which Nash-type strategic interaction between the informed customers and the uninformed firms results always in a particular separating equilibrium. The equilibrium allocation is unique and Pareto-efficient in the interim sense subject to incentive-compatibility and individual rationality. In fact, it is the unique neutral optimum in the sense of Myerson [22].

This paper considers project financing under adverse selection and moral hazard and makes three c... more This paper considers project financing under adverse selection and moral hazard and makes three contributions. First, the issue of combinations of debt and equity is explained as the outcome of the interaction between adverse selection and moral hazard. Second, it shows that, in the presence of moral hazard, adverse selection may result in the conversion of negative into positive NPV projects leading to an improvement in social welfare. Third, it provides two rationales for the use of warrants. It also shows that, under certain conditions, a debt-warrant combination can implement the optimal contract as a competitive equilibrium.

Journal of Corporate Finance, 2019

We consider a setting in which an entrepreneur seeks bank financing, and the project type is her ... more We consider a setting in which an entrepreneur seeks bank financing, and the project type is her private information. Different from existing theories featuring information asymmetry, and consistent with empirical findings, our model predicts: greater bank competition leads to increased bank lending as interest rates fall, leading to lower quality loans. The relationship between market power and financing efficiency is hill-shaped. An intermediate level of market power is desirable, as it can mitigate inefficiencies arising due to cross-subsidization among borrowers in a pooling equilibrium. Interest rate controls may achieve efficiency, but the specific policy depends on the bank market structure.

Journal of Money, Credit and Banking, 2017

This article may be used for non-commercial purposes in accordance with Wiley Terms and Condition... more This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving. A note on versions: The version presented here may differ from the published version or, version of record, if you wish to cite this item you are advised to consult the publisher's version. Please see the 'permanent WRAP url' above for details on accessing the published version and note that access may require a subscription.

Journal of Corporate Finance, 2016

We explore the effect of financial development on corporate capital structure and the tightness o... more We explore the effect of financial development on corporate capital structure and the tightness of financial constraints that firms face. We employ an econometric technique which allows us to explicitly test for convergence in capital structure. This technique increases the power of our statistical tests. In doing so, we identify a group of convergent firms. The driving force of convergence is financial development, which positively affects the firms' leverage ratio. We also identify a group of firms, whose leverage is not affected by financial development, because they are financially constrained.

Medical Hypotheses, 2015

Recent evidence shows that mitochondria regulate nuclear transcriptional activity both in normal ... more Recent evidence shows that mitochondria regulate nuclear transcriptional activity both in normal and cell stress conditions, known as retrograde signaling. Under normal mitochondrial function, retrograde signaling is associated with mitochondrial biogenesis, normal cell phenotype and metabolic profile. In contrast, mitochondrial dysfunction leads to abnormal (oncogenic) cell phenotype and altered bio-energetic profile (nucleus reprogramming). Despite intense research efforts, a concrete mechanism through which mitochondria determine the group of genes expressed by the nucleus is still missing. The present paper proposes a novel hypothesis regarding retrograde signaling. More specifically, it reveals the mitochondrial membrane potential (MMP) and the accompanied strong electromagnetic field (EF) as key regulatory factors of nuclear activity. Mitochondrial emitted EFs extend in long distance and affect the function of nuclear membrane receptors. Depending on their frequencies, EFs can directly activate or deactivate different groups of nuclear receptors and so determine nuclear gene expression. One of the key features of the above hypothesis is that nuclear membrane receptors, besides their own endogenous or chemical ligands (hormones, lipids, etc.), can also be activated by electromagnetic signals. Moreover, normal MMP values (about -140mV) are associated with the production of high ATP quantities and small levels of reactive oxygen species (ROS) while the hyperpolarization observed in all cancer cell types leads to a dramatic fall in ATP production and an analogous increase in ROS. The diminished ATP and increased ROS production negatively affect the function of all cellular systems including nucleus. Restoration of mitochondrial function, which is characterized by the fluctuation of MMP and EF values within a certain (normal) range, is proposed as a necessary condition for normal nuclear function and cancer therapy.

SSRN Electronic Journal, 2015

This paper revisits the problem of adverse selection in the insurance market of Rothschild and St... more This paper revisits the problem of adverse selection in the insurance market of Rothschild and Stiglitz [35]. We extend the three-stage game in Hellwig [19] by allowing firms to endogenously choose whether or not to pre-commit on their contractual offers (menus). We show how this mechanism can deliver the Miyazaki-Wilson-Spence allocation as the unique perfect-Bayesian equilibrium. This allocation is the unique incentive-efficient and individually-rational maximizer of the utility of the most profitable type. In fact, given that the informed player has only two types, it is the unique core allocation and thus the unique neutral optimum in the sense of Myerson [29].

SSRN Electronic Journal, 2012

ABSTRACT We develop a theoretical model to explain why some issues of convertible bonds include a... more ABSTRACT We develop a theoretical model to explain why some issues of convertible bonds include a call feature whereas others do not and then test the predictions of the model empirically. The reasoning in the model is that good firms do not need a call feature and therefore issue straight debt or non-callable convertibles. Bad firms issue callable convertibles, because a call might help them to avoid bankruptcy costs if their prospects deteriorate in a later period. A separating equilibrium for the model is demonstrated. The model predicts that the announcement of a non-callable convertible will have a smaller negative impact on the share price than that of a callable convertible; this is confirmed by the data, for which the price effects are -3.97% and -6.15% respectively. A second prediction is that announcing a call (and forcing conversion) conveys bad news to the market; we find that there is a significant short-term effect on the share price, but only if the call is made relatively quickly. Finally, we check whether issuing or calling a convertible is associated with abnormal subsequent performance over three years and find that it is not.

Current Pharmaceutical Design, 2014

Mitochondrial dysfunction has been implicated in the development of a wide spectrum of major huma... more Mitochondrial dysfunction has been implicated in the development of a wide spectrum of major human diseases, including diabetes mellitus, heart disorders, neurodegeneration and cancer. Several therapeutic approaches targeting mitochondrial function have been applied in most cases without however the desired outcome. The limited effectiveness of these therapeutic schemes is due to the fact that several important aspects of mitochondrial function have not been elucidated as yet, including the detailed mechanism of ATP production. Although it is known that electron transport chain (ETC) is the central machinery responsible for mitochondrial oxidative ATP production, major important functions attributed to ETC are still unresolved while other activities which are in fact carried out by the ETC have been overlooked. This review revisits ATP synthesis providing a detailed account of the experimentally-verified ETC functions focused on the ability of ETC to act as an electro-electric converter, able to accept different electrons from any given energy source (light, food or metals) in order to produce the correct voltage and store it in the form of electrostatic potentials (mitochondrial membrane potential). This stored electric energy, in the order of 3x10(7) V/m, can then be used by F1F0 ATP synthase for ATP production. The present review provides supportive evidence that this ETC function suffices to fully explain the missing parts of ATP production, thus redirecting the current therapeutic schemes for the management of mitochondrial diseases to a more complete and effective avenue.

SSRN Electronic Journal, 2008

Competitive models of asymmetric information predict a positive relationship between coverage and... more Competitive models of asymmetric information predict a positive relationship between coverage and risk. In contrast, most recent empirical studies find either negative or zero correlation. This paper, by introducing heterogeneity in risk perceptions into an asymmetric information competitive model, provides an explanation to this puzzle. If optimism discourages precautionary effort, there exist separating equilibria exhibiting the observed empirical patterns. It is also shown that zero correlation is consistent with information barriers to trade in insurance markets. The predictions of our model allow us to empirically distinguish it from standard asymmetric information models.

SSRN Electronic Journal, 2010

In this paper, we provide a unified framework for analyzing competitive markets with adverse sele... more In this paper, we provide a unified framework for analyzing competitive markets with adverse selection. The key feature of our model is that whether the firms (uninformed) are committed to the contracts they offer or not is determined endogenously. Due to endogenous commitment, our model always has a unique Bayes-Nash equilibrium without using any refinement to restrict beliefs off-the-equilibrium path. We show that both the non-existence problem in the two-stage screening games and the multiplicity of equilibria in the three-stage screening and the signalling games are due to exogenous full commitment (non-existence) and exogenous lack of commitment (multiplicity).

SSRN Electronic Journal, 2012

This study applies the panel convergence methodology developed by Philips and Sul (2007) on the d... more This study applies the panel convergence methodology developed by Philips and Sul (2007) on the debt maturity ratios of a set of firms in developed economies, to explore the effects of credit market integration on debt maturity choices. In contrast to prior studies, our methodology allows for a formal quantification of the integration process. Therefore, we are able to track the evolution of integration over time and identify the conditions under which it is stronger. Firms that are able to integrate with international credit markets face a lower degree of informational asymmetries and have higher collateral value. Furthermore, as firms integrate with international credit markets, they extend their debt maturity. This evidence provides support to the argument that financial integration has a positive impact on firms, by facilitating access to long-term capital. On the contrary, firms not affected by credit market integration, experience a decrease in their debt maturity, as integration continues.

SSRN Electronic Journal, 2011

This paper revisits the problem of adverse selection in the insurance market of Rothschild and St... more This paper revisits the problem of adverse selection in the insurance market of Rothschild and Stiglitz [24]. We propose a simple extension of the game-theoretic structure in Hellwig [13] under which Nash-type strategic interaction between the informed customers and the uninformed firms results always in a particular separating equilibrium. The equilibrium allocation is unique and Pareto-efficient in the interim sense subject to incentive-compatibility and individual rationality. In fact, it is the unique neutral optimum in the sense of Myerson [20].

SSRN Electronic Journal, 2013

ABSTRACT This paper argues that the interaction between information sharing among creditors and l... more ABSTRACT This paper argues that the interaction between information sharing among creditors and legal protection of creditors is an important determinant of debt maturity. Short-term debt plays a dual role as a signalling device to overcome ex-ante information asymmetry, and as a commitment device to restrict ex-post diversion of cash flows. The commitment role dominates the signalling role when creditor rights are relatively weak. Our key prediction is that information sharing has a larger impact on debt maturity when creditor rights are weaker. We find empirical support for the prediction using firm-level data around the world.

Medical Hypotheses, 2014

Mitochondrial membrane potential (MMP) is the most reliable indicator of mitochondrial function. ... more Mitochondrial membrane potential (MMP) is the most reliable indicator of mitochondrial function. The MMP value range of -136 to -140mV has been considered optimal for maximum ATP production for all living organisms. Even small changes from the above range result in a large fall in ATP production and a large increase in ROS production. The resulting bioenergetic deregulation is considered as the causative agent for numerous major human diseases. Normalization of MMP value improves mitochondrial function and gives excellent therapeutic results. In order for a systematic effective treatment of these diseases to be developed, a detailed knowledge of the mechanism of MMP production is absolutely necessary. However, despite the long-standing research efforts, a concrete mechanism for MMP production has not been found yet. The present paper proposes a novel mechanism of MMP production based on new considerations underlying the function of the two basic players of MMP production, the electron transport chain (ETC) and the F1F0 ATP synthase. Under normal conditions, MMP is almost exclusively produced by the electron flow through ETC complexes I-IV, creating a direct electric current that stops in subunit II of complex IV and gradually charges MMP. However, upon ETC dysfunction F1F0 ATP synthase reverses its action and starts to hydrolyze ATP. ATP hydrolysis further produces electric energy which is transferred, in the form of a direct electric current, from F1 to F0 where is used to charge MMP. This new model is expected to redirect current experimental research on mitochondrial bioenergetics and indicate new therapeutic schemes for mitochondrial disorders.

Journal of Mathematical Economics, 2009

We consider project financing under adverse selection and moral hazard and derive several interes... more We consider project financing under adverse selection and moral hazard and derive several interesting results. First, we provide an explanation of why good firms issue both debt and underpriced equity (even if the bankruptcy and agency costs of debt are zero). Second, we show that, in the presence of moral hazard, adverse selection may induce the conversion of negative into positive NPV projects leading to an improvement in social welfare. Third, we provide a rationale for the use of warrants. We also show that a debtwarrant combination can implement the optimal contract. Our results have a number of testable implications.

Journal of Financial Economics, 2021

The version presented here is a Working Paper (or 'pre-print') that may be later published elsewh... more The version presented here is a Working Paper (or 'pre-print') that may be later published elsewhere.

Journal of Financial Economics, 2022

This paper revisits the problem of adverse selection in the insurance market of Rothschild and St... more This paper revisits the problem of adverse selection in the insurance market of Rothschild and Stiglitz [28]. We propose a simple extension of the game-theoretic structure in Hellwig [14] under which Nash-type strategic interaction between the informed customers and the uninformed firms results always in a particular separating equilibrium. The equilibrium allocation is unique and Pareto-efficient in the interim sense subject to incentive-compatibility and individual rationality. In fact, it is the unique neutral optimum in the sense of Myerson [22].

This paper considers project financing under adverse selection and moral hazard and makes three c... more This paper considers project financing under adverse selection and moral hazard and makes three contributions. First, the issue of combinations of debt and equity is explained as the outcome of the interaction between adverse selection and moral hazard. Second, it shows that, in the presence of moral hazard, adverse selection may result in the conversion of negative into positive NPV projects leading to an improvement in social welfare. Third, it provides two rationales for the use of warrants. It also shows that, under certain conditions, a debt-warrant combination can implement the optimal contract as a competitive equilibrium.

Journal of Corporate Finance, 2019

We consider a setting in which an entrepreneur seeks bank financing, and the project type is her ... more We consider a setting in which an entrepreneur seeks bank financing, and the project type is her private information. Different from existing theories featuring information asymmetry, and consistent with empirical findings, our model predicts: greater bank competition leads to increased bank lending as interest rates fall, leading to lower quality loans. The relationship between market power and financing efficiency is hill-shaped. An intermediate level of market power is desirable, as it can mitigate inefficiencies arising due to cross-subsidization among borrowers in a pooling equilibrium. Interest rate controls may achieve efficiency, but the specific policy depends on the bank market structure.

Journal of Money, Credit and Banking, 2017

This article may be used for non-commercial purposes in accordance with Wiley Terms and Condition... more This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving. A note on versions: The version presented here may differ from the published version or, version of record, if you wish to cite this item you are advised to consult the publisher's version. Please see the 'permanent WRAP url' above for details on accessing the published version and note that access may require a subscription.

Journal of Corporate Finance, 2016

We explore the effect of financial development on corporate capital structure and the tightness o... more We explore the effect of financial development on corporate capital structure and the tightness of financial constraints that firms face. We employ an econometric technique which allows us to explicitly test for convergence in capital structure. This technique increases the power of our statistical tests. In doing so, we identify a group of convergent firms. The driving force of convergence is financial development, which positively affects the firms' leverage ratio. We also identify a group of firms, whose leverage is not affected by financial development, because they are financially constrained.

Medical Hypotheses, 2015

Recent evidence shows that mitochondria regulate nuclear transcriptional activity both in normal ... more Recent evidence shows that mitochondria regulate nuclear transcriptional activity both in normal and cell stress conditions, known as retrograde signaling. Under normal mitochondrial function, retrograde signaling is associated with mitochondrial biogenesis, normal cell phenotype and metabolic profile. In contrast, mitochondrial dysfunction leads to abnormal (oncogenic) cell phenotype and altered bio-energetic profile (nucleus reprogramming). Despite intense research efforts, a concrete mechanism through which mitochondria determine the group of genes expressed by the nucleus is still missing. The present paper proposes a novel hypothesis regarding retrograde signaling. More specifically, it reveals the mitochondrial membrane potential (MMP) and the accompanied strong electromagnetic field (EF) as key regulatory factors of nuclear activity. Mitochondrial emitted EFs extend in long distance and affect the function of nuclear membrane receptors. Depending on their frequencies, EFs can directly activate or deactivate different groups of nuclear receptors and so determine nuclear gene expression. One of the key features of the above hypothesis is that nuclear membrane receptors, besides their own endogenous or chemical ligands (hormones, lipids, etc.), can also be activated by electromagnetic signals. Moreover, normal MMP values (about -140mV) are associated with the production of high ATP quantities and small levels of reactive oxygen species (ROS) while the hyperpolarization observed in all cancer cell types leads to a dramatic fall in ATP production and an analogous increase in ROS. The diminished ATP and increased ROS production negatively affect the function of all cellular systems including nucleus. Restoration of mitochondrial function, which is characterized by the fluctuation of MMP and EF values within a certain (normal) range, is proposed as a necessary condition for normal nuclear function and cancer therapy.

SSRN Electronic Journal, 2015

This paper revisits the problem of adverse selection in the insurance market of Rothschild and St... more This paper revisits the problem of adverse selection in the insurance market of Rothschild and Stiglitz [35]. We extend the three-stage game in Hellwig [19] by allowing firms to endogenously choose whether or not to pre-commit on their contractual offers (menus). We show how this mechanism can deliver the Miyazaki-Wilson-Spence allocation as the unique perfect-Bayesian equilibrium. This allocation is the unique incentive-efficient and individually-rational maximizer of the utility of the most profitable type. In fact, given that the informed player has only two types, it is the unique core allocation and thus the unique neutral optimum in the sense of Myerson [29].

SSRN Electronic Journal, 2012

ABSTRACT We develop a theoretical model to explain why some issues of convertible bonds include a... more ABSTRACT We develop a theoretical model to explain why some issues of convertible bonds include a call feature whereas others do not and then test the predictions of the model empirically. The reasoning in the model is that good firms do not need a call feature and therefore issue straight debt or non-callable convertibles. Bad firms issue callable convertibles, because a call might help them to avoid bankruptcy costs if their prospects deteriorate in a later period. A separating equilibrium for the model is demonstrated. The model predicts that the announcement of a non-callable convertible will have a smaller negative impact on the share price than that of a callable convertible; this is confirmed by the data, for which the price effects are -3.97% and -6.15% respectively. A second prediction is that announcing a call (and forcing conversion) conveys bad news to the market; we find that there is a significant short-term effect on the share price, but only if the call is made relatively quickly. Finally, we check whether issuing or calling a convertible is associated with abnormal subsequent performance over three years and find that it is not.

Current Pharmaceutical Design, 2014

Mitochondrial dysfunction has been implicated in the development of a wide spectrum of major huma... more Mitochondrial dysfunction has been implicated in the development of a wide spectrum of major human diseases, including diabetes mellitus, heart disorders, neurodegeneration and cancer. Several therapeutic approaches targeting mitochondrial function have been applied in most cases without however the desired outcome. The limited effectiveness of these therapeutic schemes is due to the fact that several important aspects of mitochondrial function have not been elucidated as yet, including the detailed mechanism of ATP production. Although it is known that electron transport chain (ETC) is the central machinery responsible for mitochondrial oxidative ATP production, major important functions attributed to ETC are still unresolved while other activities which are in fact carried out by the ETC have been overlooked. This review revisits ATP synthesis providing a detailed account of the experimentally-verified ETC functions focused on the ability of ETC to act as an electro-electric converter, able to accept different electrons from any given energy source (light, food or metals) in order to produce the correct voltage and store it in the form of electrostatic potentials (mitochondrial membrane potential). This stored electric energy, in the order of 3x10(7) V/m, can then be used by F1F0 ATP synthase for ATP production. The present review provides supportive evidence that this ETC function suffices to fully explain the missing parts of ATP production, thus redirecting the current therapeutic schemes for the management of mitochondrial diseases to a more complete and effective avenue.

SSRN Electronic Journal, 2008

Competitive models of asymmetric information predict a positive relationship between coverage and... more Competitive models of asymmetric information predict a positive relationship between coverage and risk. In contrast, most recent empirical studies find either negative or zero correlation. This paper, by introducing heterogeneity in risk perceptions into an asymmetric information competitive model, provides an explanation to this puzzle. If optimism discourages precautionary effort, there exist separating equilibria exhibiting the observed empirical patterns. It is also shown that zero correlation is consistent with information barriers to trade in insurance markets. The predictions of our model allow us to empirically distinguish it from standard asymmetric information models.

SSRN Electronic Journal, 2010

In this paper, we provide a unified framework for analyzing competitive markets with adverse sele... more In this paper, we provide a unified framework for analyzing competitive markets with adverse selection. The key feature of our model is that whether the firms (uninformed) are committed to the contracts they offer or not is determined endogenously. Due to endogenous commitment, our model always has a unique Bayes-Nash equilibrium without using any refinement to restrict beliefs off-the-equilibrium path. We show that both the non-existence problem in the two-stage screening games and the multiplicity of equilibria in the three-stage screening and the signalling games are due to exogenous full commitment (non-existence) and exogenous lack of commitment (multiplicity).

SSRN Electronic Journal, 2012

This study applies the panel convergence methodology developed by Philips and Sul (2007) on the d... more This study applies the panel convergence methodology developed by Philips and Sul (2007) on the debt maturity ratios of a set of firms in developed economies, to explore the effects of credit market integration on debt maturity choices. In contrast to prior studies, our methodology allows for a formal quantification of the integration process. Therefore, we are able to track the evolution of integration over time and identify the conditions under which it is stronger. Firms that are able to integrate with international credit markets face a lower degree of informational asymmetries and have higher collateral value. Furthermore, as firms integrate with international credit markets, they extend their debt maturity. This evidence provides support to the argument that financial integration has a positive impact on firms, by facilitating access to long-term capital. On the contrary, firms not affected by credit market integration, experience a decrease in their debt maturity, as integration continues.

SSRN Electronic Journal, 2011

This paper revisits the problem of adverse selection in the insurance market of Rothschild and St... more This paper revisits the problem of adverse selection in the insurance market of Rothschild and Stiglitz [24]. We propose a simple extension of the game-theoretic structure in Hellwig [13] under which Nash-type strategic interaction between the informed customers and the uninformed firms results always in a particular separating equilibrium. The equilibrium allocation is unique and Pareto-efficient in the interim sense subject to incentive-compatibility and individual rationality. In fact, it is the unique neutral optimum in the sense of Myerson [20].

SSRN Electronic Journal, 2013

ABSTRACT This paper argues that the interaction between information sharing among creditors and l... more ABSTRACT This paper argues that the interaction between information sharing among creditors and legal protection of creditors is an important determinant of debt maturity. Short-term debt plays a dual role as a signalling device to overcome ex-ante information asymmetry, and as a commitment device to restrict ex-post diversion of cash flows. The commitment role dominates the signalling role when creditor rights are relatively weak. Our key prediction is that information sharing has a larger impact on debt maturity when creditor rights are weaker. We find empirical support for the prediction using firm-level data around the world.

Medical Hypotheses, 2014

Mitochondrial membrane potential (MMP) is the most reliable indicator of mitochondrial function. ... more Mitochondrial membrane potential (MMP) is the most reliable indicator of mitochondrial function. The MMP value range of -136 to -140mV has been considered optimal for maximum ATP production for all living organisms. Even small changes from the above range result in a large fall in ATP production and a large increase in ROS production. The resulting bioenergetic deregulation is considered as the causative agent for numerous major human diseases. Normalization of MMP value improves mitochondrial function and gives excellent therapeutic results. In order for a systematic effective treatment of these diseases to be developed, a detailed knowledge of the mechanism of MMP production is absolutely necessary. However, despite the long-standing research efforts, a concrete mechanism for MMP production has not been found yet. The present paper proposes a novel mechanism of MMP production based on new considerations underlying the function of the two basic players of MMP production, the electron transport chain (ETC) and the F1F0 ATP synthase. Under normal conditions, MMP is almost exclusively produced by the electron flow through ETC complexes I-IV, creating a direct electric current that stops in subunit II of complex IV and gradually charges MMP. However, upon ETC dysfunction F1F0 ATP synthase reverses its action and starts to hydrolyze ATP. ATP hydrolysis further produces electric energy which is transferred, in the form of a direct electric current, from F1 to F0 where is used to charge MMP. This new model is expected to redirect current experimental research on mitochondrial bioenergetics and indicate new therapeutic schemes for mitochondrial disorders.

Journal of Mathematical Economics, 2009

We consider project financing under adverse selection and moral hazard and derive several interes... more We consider project financing under adverse selection and moral hazard and derive several interesting results. First, we provide an explanation of why good firms issue both debt and underpriced equity (even if the bankruptcy and agency costs of debt are zero). Second, we show that, in the presence of moral hazard, adverse selection may induce the conversion of negative into positive NPV projects leading to an improvement in social welfare. Third, we provide a rationale for the use of warrants. We also show that a debtwarrant combination can implement the optimal contract. Our results have a number of testable implications.