Debt Contract Design

In the capital market, debt contract is an important method for the debtors to collect the fund, and for the investors to invest and obtain benefits. It is an important protection mechanism for creditor rights and interests. The person who signs and executes debt contract is the natural people, so their psychological and behavioral character have an important influence on the debt contract. However, most of the former scholar's research is based on the hypothesis that contract participants are rational completely. There are inevitably certain limitations to explain and forecast the economy, if you apply the theory which was developed according to such hypothesis. Therefore, it is necessary to analyze the contract participant's psychological and behavioral character, and utilizes it to the debt contract design.This article has a summary to elementary theory of the contract firstly, and introduces the financial contract concept and its classification, then carries on a historical review to the capital structure theory. We analyses the financial contract theory with emphasis. The second part elaborates design target and principle of the debt contract firstly, then separately analyses basic character of six design factors: the debtor, the investor, the price and income clause, the time clause, the restrictive clause and the disobey clause. The third part has a discussion on the psychological and behavioral character of the debt contract participant which involved in signing and performing contract process by utilizing psychology and behavior theory. This chapter elaborates behavioral character of the creditor and the debtor in the judgment and the decision-making process, as well as the deviation which caused. There are mainly representative and its deviation, availability and its deviation, anchoring in judgment process; and mental account, self-control and loss aversion in the decision-making process. The fourth part analyses the debt contract design of the price and income clause, the time clause, the restrictive clause and the disobey clause based on the former analysis. This article will be helpful to construct the protection mechanism for creditor rights and interests.