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Dynamic Capital Structure under Managerial Entrenchment

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Author Info
Zwiebel, Jeffrey
Abstract

This paper develops a model in which managers voluntarily choose debt to credibly constrain their own future empire-building. Dynamically consistent capital structure is derived as the optimal response in each period of partially entrenched managers trading off empire-building ambitions with the need to ensure sufficient efficiency to prevent control challenges. A policy of capital structure coordinated with dividends follows naturally, as do implications for the level, frequency, and maturity structure of debt as a function of outside investment opportunities. Additionally, the model yields new testable implications for security design, and changes in debt and empire-building over managerial careers. Copyright 1996 by American Economic Association.

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Publisher Info
Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 86 (1996)
Issue (Month): 5 (December)
Pages: 1197-1215
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Handle: RePEc:aea:aecrev:v:86:y:1996:i:5:p:1197-1215

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