Short-Term Versus Long-Term Interests: Capital Structure with Multiple Investors

Posted: 14 Sep 1999

See all articles by Erik Berglöf

Erik Berglöf

Institute of Global Affairs, London School of Economics and Political Science

Ernst-Ludwig von Thadden

Universitaet Mannheim; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Date Written: March 1994

Abstract

We study the problem of financial contracting and renegotiation between a firm and outside investors when the firm cannot commit to future payouts, but assets can be contracted upon. We show that a capital structure with multiple investors specializing in short-term and long-term claims is superior to a structure with only one type of claim. By separating their claims over time and by giving short-term claims priority over long-term claims when debt repayments are not met, investors can harden the incentives for the entrepreneur to renegotiate the contract ex post. Depending on the parameters, the optimal capital structure also differentiates between state-independent and state- dependent long-term claims, which can be interpreted as long-term debt and equity.

JEL Classification: G3, G32

Suggested Citation

Berglöf, Erik and von Thadden, Ernst-Ludwig, Short-Term Versus Long-Term Interests: Capital Structure with Multiple Investors (March 1994). Available at SSRN: https://ssrn.com/abstract=5510

Erik Berglöf (Contact Author)

Institute of Global Affairs, London School of Economics and Political Science ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Ernst-Ludwig Von Thadden

Universitaet Mannheim ( email )

Department of Economics
Mannheim, 68131
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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