Capital Structure Choice When Managers are in Control: Entrenchment Versus Efficiency

42 Pages Posted: 9 Jul 1998  

Luigi Zingales

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Walter Novaes

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics

Date Written: December 1995

Abstract

Recent capital structure theories have emphasized the role of debt in minimizing the agency costs that arise from the separation between ownership and control. In this paper we argue that capital structure choices themselves are affected by the same agency problem. We show that, in general, the shareholders' and the manager's capital structure choices differ not only in their levels, but also in their sensitivities to the cost of financial distress and taxes. We argue that only the managerial perspective can explain why firms are generally reluctant to issue equity, why they issue it only following a stock price run-up, and why Corporate America recently deleveraged under the same tax system that supposedly generated the increase in leverage in the 1980s.

Suggested Citation

Zingales, Luigi and Novaes, Walter, Capital Structure Choice When Managers are in Control: Entrenchment Versus Efficiency (December 1995). NBER Working Paper No. w5384. Available at SSRN: https://ssrn.com/abstract=7216

Luigi Zingales (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
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773-702-3196 (Phone)
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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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Walter Novaes

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics ( email )

Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22453
Brazil

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