Abstract

http://ssrn.com/abstract=7216
 
 

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Capital Structure Choice When Managers are in Control: Entrenchment Versus Efficiency


Luigi Zingales


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); University of Chicago - Polsky Center for Entrepreneurship; European Corporate Governance Institute (ECGI)

Walter Novaes


Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics

December 1995

NBER Working Paper No. w5384

Abstract:     
Recent capital structure theories have emphasized the role of debt in minimizing the agency costs that arise from the separation between ownership and control. In this paper we argue that capital structure choices themselves are affected by the same agency problem. We show that, in general, the shareholders' and the manager's capital structure choices differ not only in their levels, but also in their sensitivities to the cost of financial distress and taxes. We argue that only the managerial perspective can explain why firms are generally reluctant to issue equity, why they issue it only following a stock price run-up, and why Corporate America recently deleveraged under the same tax system that supposedly generated the increase in leverage in the 1980s.

Number of Pages in PDF File: 42

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Date posted: July 9, 1998  

Suggested Citation

Zingales, Luigi and Novaes, Walter, Capital Structure Choice When Managers are in Control: Entrenchment Versus Efficiency (December 1995). NBER Working Paper No. w5384. Available at SSRN: http://ssrn.com/abstract=7216

Contact Information

Luigi Zingales (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-3196 (Phone)
773-834-2081 (Fax)

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National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
University of Chicago - Polsky Center for Entrepreneurship
Chicago, IL 60637
United States
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
HOME PAGE: http://www.ecgi.org
Walter Novaes
Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics ( email )
Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22453
Brazil
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