Managerial Entrenchment and the Choice of Debt Financing

29 Pages Posted: 15 Feb 2006

See all articles by Amadou Nicolas Racine Sy

Amadou Nicolas Racine Sy

International Monetary Fund (IMF) - International Capital Markets Department; Brookings Institution

Date Written: July 1999

Abstract

The paper analyzes the choice between public and private debt by an entrenched manager. The model shows that when the firm`s credit risk is low, management issues public bonds because of the value gains from increased flexibility rather than reduced restrictions and monitoring. In fact, management`s expected private gains decrease as initial private debt restrictions are selectively relaxed. In contrast, when credit risk is high, management issues private debt because of the value gains and private benefits from renegotiating more stringent restrictions. When the maturity of private debt is shortened, however, privately and publicly placed bonds can be preferred to bank debt.

Keywords: Covenant Restrictions Credit Risk Managerial Entrenchment Private Debt Public Debt

JEL Classification: G32 G21 G23

Suggested Citation

Sy, Amadou Nicolas Racine, Managerial Entrenchment and the Choice of Debt Financing (July 1999). IMF Working Paper No. 99/94, Available at SSRN: https://ssrn.com/abstract=880621

Amadou Nicolas Racine Sy (Contact Author)

International Monetary Fund (IMF) - International Capital Markets Department ( email )

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Brookings Institution ( email )

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