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Perquisites, Risk, and Capital Structure

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Author Info
 Williams, Joseph T
Abstract

In a corporate agency problem, perquisites and risk interact to produce novel, complex comparative statics. For example, even if additional debt induces risk-neutral insiders to increase risk, they never seek to increase the market value of their stock; instead, insiders decrease the present value of their subsequent, conditionally optimal perquisites. Also, the firm's optimal capital structure includes a risky bond with an agreement to remove insiders whenever the bond defaults. However, the optimal sharing rule between corporate claimants cannot be supported solely by standard securities like bonds, stock, options, and their hybrids. Copyright 1987 by American Finance Association.

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Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 42 (1987)
Issue (Month): 1 (March)
Pages: 29-48
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Handle: RePEc:bla:jfinan:v:42:y:1987:i:1:p:29-48

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  1. Allen N. Berger & Emilia Bonaccorsi di Patti, 2002. "Capital structure and firm performance: a new approach to testing agency theory and an application to the banking industry," Finance and Economics Discussion Series 2002-54, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  2. Low, Angie & Makhija, Anil K. & Sanders, Anthony B., 2007. "The Impact of Shareholder Power on Bondholders: Evidence from Mergers and Acquisitions," Working Paper Series 2007-5, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
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