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By Kai Rudolph

This paintings used to be approved as a dissertation via the college of Muenster, Germany, in 2004. It used to be written whereas i used to be a educating and learn assistant on the division of Banking. I personal many money owed - own and highbrow - to Professor Dr. Andreas Pfingsten, my doctoral adviser, for his total help whereas i used to be writing my dissertation. This thesis benefited a lot from his positive feedback. i'm additionally thankful that Professor Dr. Klaus Roder, division of Finance, college of Regensburg, Germany, acted as my moment consultant. moreover, i would like to thank Dr. Alistair Milne, Sir John Cass enterprise tuition, urban collage, nice Britain, because he assisted me in the course of a vital section of my dissertation undertaking whereas i used to be staying as a vacationing pupil on the Marie Curie education website in company Finance, Capital Markets and Banking at Cass. This 5 month stopover at in London used to be financially supported through the eu fee (Fellowship Ref. No. HPMT-GH-01-00330-04). i'm additionally indebted to my past colleagues, usually Dr. Hendrik Hakenes and Dr. Markus Ricke, for his or her encouragement and important discussions all through my complete dissertation venture. The dissertation additionally benefited from reviews on a primary operating paper concerning the dissertation's subject via individuals of analysis seminars on the Universities of Constance, Tuebingen and Osnabrueck, Germany, and on the 2003 Annual assembly of the eu fiscal organization, Stockholm, Sweden.

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In the short-run relationship lending can be beneficial for the firm since being tied to a single lender might enable the lender to reduce the firm's initial interest payments and thereby the firm's potential incentive to engage in asset substitution (cf. Petersen and Rajan (1995)). The lender can reduce the firm's initial payments since he is able to backload interest payments over time, subsidizing the firm in the short-run and extracting rents later. This solution is beneficial for the lender and the borrower in total since the low See Boot (2000) for a recent review.

This is shown by Myers and Majluf (1984). As already mentioned, they demonstrate that managers only issue equity if the firm is overvalued and any potential wealth loss due to a negative net present value project is overcompensated by the wealth transfer from new to current shareholders; or if the firm is undervalued while the wealth transfer from current to new shareholders is overcompensated by shareholders' project return participation. This issuing behavior is anticipated by the investors. Therefore, investors fear to be exploited and demand an appropriate compensation which in turn affects the firm's issue-investment decision.

Petersen and Rajan (1995)). 2 Bargaining Power Considerations in Financial Contracting 29 control cannot be acquired cheaply by the party with private benefits. When non-voting securities are sold they should be riskfree debt. The private optimality of one share / one vote hinges again on the asymmetric distribution of private benefits. A further alternative is presented by Bergman and Callen (1991). They model debt renegotiations as a sequential bargaining process between creditors and shareholders and show t h a t shareholders can enforce ex-post concessions from the firm's creditors by threatening to run down the firm since they are still in charge of the firm's investment decisions.

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