A Model of Market Discipline
56 Pages Posted: 3 Jun 2020 Last revised: 23 Oct 2020
Date Written: October 22, 2020
We develop an equilibrium model where cash holdings, costly refinancing policies, and managerial incentives are jointly determined to quantify the market's influence on management's ex ante behavior. We also derive a general formula that shows how agency and financing distortions shape payouts and compensation, two easily measured quantities. Our calibrated model estimates agency conflicts are nearly 10 times more severe than financial frictions for US public firms. Our analysis suggests that cutting corporate income taxes while introducing a tax on refinancing can reduce the relative severity of agency.
Keywords: Financial Frictions, Agency Conflicts, Dynamic Contracting, Refinancing, Payouts, Compensation
JEL Classification: D21, D61, D92, G32, G35, L22
Suggested Citation: Suggested Citation