ABSTRACT
This chapter argues that the combination of limited liability and financial structure gives rise to incentives for the shareholders to over- as well as to under-invest in almost all circumstances. The uncertainty surrounding investment returns is at the basis of the financial structure of both the firm and the project. The standard framework of agency costs of debt assumes that investment decisions are prior to firm financing strategy and that operating decisions are taken by shareholders in order to maximise the value of equity. If the financial structure of the firm can be more or less complex depending on how finely it is risk spread over different types of claimants. The firm value depends in a predictable way on the complexity and other characteristics of such a financial structure; and the structure has any influence on the firm's capacity to undertake risky projects involving intellectual property rights.
