Managerial Autonomy, Allocation of Control Rights and Optimal Capital Structure

Boot, Arnoud W. A.; Thakor, Anjan V.

doi:10.2139/ssrn.1673805

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Managerial Autonomy, Allocation of Control Rights and Optimal Capital Structure

Amsterdam Center for Law & Economics Working Paper No. 2010-09

56 Pages Posted: 10 Sep 2010 Last revised: 10 Mar 2011

See all articles by Arnoud W. A. Boot

Arnoud W. A. Boot

University of Amsterdam - Amsterdam Business School; Centre for Economic Policy Research (CEPR); Tinbergen Institute

Washington University in St. Louis - John M. Olin Business School; Financial Theory Group; European Corporate Governance Institute (ECGI); Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering

There are 2 versions of this paper

Date Written: September 1, 2010

Abstract

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

Boot, Arnoud W. A. and Thakor, Anjan V., Managerial Autonomy, Allocation of Control Rights and Optimal Capital Structure (September 1, 2010). Amsterdam Center for Law & Economics Working Paper No. 2010-09, Available at SSRN: https://ssrn.com/abstract=1673805 or http://dx.doi.org/10.2139/ssrn.1673805