Stock Pyramids, Soft Budget Constraint And Debt Governance

The governance role of debt has been the focus of literature from Corporate Finance. Now, the"Incomplete Contract Theory"represents the frontier of this area. The key point for the governance role of debt is the hard budget constraint, that is to say firms who have loans must pay the principal and interests on time. Soft Budget Constraint (SBC) which means central planner must commit to save the companies who had been caught in financial constraint, including events such as hindering the reorganization of bankrupt firms, subsidizing deficit enterprises continually, prolonging the deadline of bad loan and even refunding them, has been the symbol of transition economies, not to say China. SBC will undermine the governance role of debt. My research used the approach of two stage dynamic game theory to find something as follows: Under the controlling...