Managerial Autonomy, Allocation of Control Rights and Optimal Capital Structure
56 Pages Posted: 10 Sep 2010 Last revised: 30 Mar 2011
Date Written: September 1, 2010
We examine the design of control rights of external financiers and how these interact with the firm’s security issuance and capital structure when the firm’s initial owners and manager may disagree with new investors over project choice. The first main result is an ex ante managerial preference for “soft” financial claims that maximize managerial project-choice autonomy, in contrast to agency theory. Second, a dynamic “pecking order” of cash, equity and debt emerges. Additional results explain equity issuance at high prices, why leverage ratios drift with stock returns, cash hoarding and debt usage without taxes, agency or signaling.
Keywords: managerial autonomy, control rights, capital structure
JEL Classification: G30, G32
Suggested Citation: Suggested Citation