Creditor’s Holdup, Releveraging and the Setting of Private Appropriation in a Control Contract Between Shareholders

Abstract

Debt is analyzed in relation to the conflict between three parties, a controlling shareholder, outside investors and creditors. We follow Jensen and Meckling’s (1976) and Myers’ (1977) intuitions that a leverage may result in excess value appropriation by creditors while at the same time acting to discipline private benefits appropriation. A contingent claim valuation model is used to show that debt releveraging is also a key governance variable when incentivization triggers a transfer of value to creditors. We show that debt is a complex regulation tool in an agency contract approach as it interferes endogenously with private benefits incentivization schemes particularly when value creation events occur.

Keywords: creditors’ holdup, private benefits, controlling shareholders, debt leverage, releveraging, corporate governance

JEL Classification: G32, G34