Capital Structure Under Costly Enforcement

23 Pages Posted: 17 Sep 2008

See all articles by Hans K. Hvide

Hans K. Hvide

University of Bergen - Department of Economics; University of Aberdeen - Business School; Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)

Tore E. Leite

Norwegian School of Economics (NHH)

Multiple version iconThere are 2 versions of this paper

Date Written: 2008-02

Abstract

We consider financial structure and repayment behavior in a setting where cash flows are private information to the entrepreneur and the cost of enforcing repayment differs across security holders. If enforcement costs are lower for shareholders than for creditors, a mixed capital structure with debt and equity can obtain in equilibrium. Under a mixed capital structure, creditors intervene in low cash-flow states while shareholders intervene in high cash-flow states. Moreover, strategic defaults, costly bankruptcy, shareholder intervention, and violation of absolute priority occur with positive probability on the equilibrium path. Several of the predictions from our framework are consistent with evidence not readily explainable by existing theories.

JEL Classification: G32, G33, D82

Suggested Citation

Hvide, Hans and Leite, Tore E., Capital Structure Under Costly Enforcement (2008-02). Scandinavian Journal of Economics, Vol. 110, No. 3, pp. 543-565, September 2008, Available at SSRN: https://ssrn.com/abstract=1269705 or http://dx.doi.org/10.1111/j.1467-9442.2008.00550.x

Hans Hvide (Contact Author)

University of Bergen - Department of Economics ( email )

Fosswinckelsgt. 6
N-5007 Bergen, 5007
Norway

University of Aberdeen - Business School ( email )

Edward Wright Building
Dunbar Street
Aberdeen, Scotland AB24 3QY
United Kingdom

HOME PAGE: http://hans.hvide.googlepages.com/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Institute for the Study of Labor (IZA) ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Tore E. Leite

Norwegian School of Economics (NHH) ( email )

Helleveien 30
N-5045 Bergen
Norway
+47 5595 9343 (Phone)
+47 5595 9841 (Fax)

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