Capital Structure Under Imperfect Enforcement

Hvide, Hans K.; Leite, Tore E.

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Capital Structure Under Imperfect Enforcement

48 Pages Posted: 8 Feb 2005

See all articles by Hans K. Hvide

Hans K. Hvide

University of Bergen - Department of Economics; University of Aberdeen - Business School; Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)

Tore E. Leite

Norwegian School of Economics (NHH)

Date Written: November 2004

Abstract

Building on a costly state verification framework, we propose a theory of capital structure with imperfect enforcement. In addition to being consistent with stylized facts on the choice of capital structure, it accommodates a range of empirical regularities on the repayment behavior, such as strategic defaults of debt obligations, costly bankruptcy, investor intervention, and violations of absolute priority rules.

Keywords: Cash diversion, costly state verification, outside equity, financial contracts

JEL Classification: G12, G32, G33, M49

Suggested Citation: Suggested Citation

Hvide, Hans and Leite, Tore E., Capital Structure Under Imperfect Enforcement (November 2004). Available at SSRN: https://ssrn.com/abstract=663405