Financial Flexibility and Manager-Shareholder Conflict

63 Pages Posted: 28 May 2017

See all articles by Timothy J. Riddiough

Timothy J. Riddiough

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics

Eva Steiner

Cornell SC Johnson College of Business

Date Written: May 26, 2017

Abstract

We show empirically that the use of unsecured debt, which contains standardized covenants that place limits on total leverage and the use of secured debt, is associated with lower and more stable leverage outcomes. We then show that firm value is sensitive to leverage levels and leverage stability, decreasing in the former and increasing in the latter. Our results suggest that unsecured debt covenants function as a managerial commitment device that preserves the firm's debt capacity to enhance financial flexibility.

Keywords: Capital structure, financial flexibility, collateral channel

JEL Classification: G00, G3, 32

Suggested Citation

Riddiough, Timothy J. and Steiner, Eva Maria, Financial Flexibility and Manager-Shareholder Conflict (May 26, 2017). Available at SSRN: https://ssrn.com/abstract=2975543 or http://dx.doi.org/10.2139/ssrn.2975543

Timothy J. Riddiough

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States
608-262-3531 (Phone)
608-265-2738 (Fax)

Eva Maria Steiner (Contact Author)

Cornell SC Johnson College of Business ( email )

465B Statler Hall
Ithaca, NY 14853
United States

HOME PAGE: http://https://sha.cornell.edu/faculty-research/faculty/ems457/

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