Managerial Protections, Capital Structure, and Investment: Theory and Evidence

55 Pages Posted: 1 Jan 2020

See all articles by Josh Bosshardt

Josh Bosshardt

Massachusetts Institute of Technology (MIT)

Ali Kakhbod

Massachusetts Institute of Technology (MIT) - Department of Economics

Date Written: December 1, 2019

Abstract

We introduce a model to illustrate three channels by which managerial protections affect how managers choose a firm’s capital structure and level of investment. First, protections can intensify the incentive for managers to increase their equity share, resulting in excessive debt financing. Second, protections reinforce the incentive for managers to avoid liquidation, leading to reduced investment. Third, an important policy implication of the model is that policies that constrain firm debt ratios, such as stress testing for bank holding companies, can counterintuitively stimulate investment for firms with protections. We find that these results are consistent with patterns in the data.

Keywords: Managerial protections, Stress testing, Capital structure, Ownership structure, Investment, Banking

JEL Classification: D24, G32

Suggested Citation

Bosshardt, Josh and Kakhbod, Ali, Managerial Protections, Capital Structure, and Investment: Theory and Evidence (December 1, 2019). Available at SSRN: https://ssrn.com/abstract=3499164 or http://dx.doi.org/10.2139/ssrn.3499164

Josh Bosshardt

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Ali Kakhbod (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

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