Study on enterprise investment-financing decision under moral hazard condition

We present the analyses on the effective strategic sets of enterprise's decisions with multiple projects and dynamic investment. We point out that the strength of the influence of the degree of the entrepreneur's moral hazard and the proportion of the manager's holding shares on the debt-equity ratio relate to the degree of the entrepreneur's absolute risk-aversion. The main results of this paper are as follows, (I) if the investment amount is endogenous, the change of the enterprise's debt-equity ratio is positively correlated with the degree of the entrepreneur's moral hazard and positively with the proportion of the entrepreneur's holding shares. (II) If the debt-equity ratio is endogenous, the change of the enterprise's debt-equity ratio is positively correlated with the degree of the entrepreneur's moral hazard. (III) The degree of the entrepreneur's risk-aversion does not change the above relationships, but change the strength of them, i.e. the more the degree of the manager's moral hazard, the weaker the above the relationships. (IV) If there are two enterprises which have the same debt-equity ratios. Then, on the one hand, if the entrepreneurs have also the same proportions of holding shares, then the one has less degree of moral hazard whose risk-aversion is higher. On the other hand, if the proportions of the entrepreneurs' holding shares are the same. then the one has less proportion of holding shares whose risk-aversion is higher.