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Specific Human Capital, Credible Commitment and Optimal Capital Structure

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  • Xiaozu Wang

    ()
    (School of Management, Fudan University)

  • Tian Zhu

    (Division of Social Science, Hong Kong University of Science and Technology)

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    Abstract

    In this paper, we show that although ex ante equityholders would like to adopt an optimal displacement and operating policy, they may not have incentives to implement such a policy ex post when the manager acquires firmspecific human capital and becomes indispensable to the firm¡¯s continued operation. An optimal mix of debt and equity can serve as a commitment device in disciplining the manager.

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    Bibliographic Info

    Article provided by Society for AEF in its journal Annals of Economics and Finance.

    Volume (Year): 5 (2004)
    Issue (Month): 1 (May)
    Pages: 47-59

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    Handle: RePEc:cuf:journl:y:2004:v:5:i:1:p:47-59

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    Related research

    Keywords: Capital structure; Bankruptcy; Specific human capital; Credible commitment; Managerial incentive;

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    1. Harris, Milton & Raviv, Artur, 1990. " Capital Structure and the Informational Role of Debt," Journal of Finance, American Finance Association, American Finance Association, vol. 45(2), pages 321-49, June.
    2. Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, American Finance Association, vol. 46(1), pages 297-355, March.
    3. Dewatripont, Mathias & Tirole, Jean, 1994. "A Theory of Debt and Equity: Diversity of Securities and Manager-Shareholder Congruence," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 109(4), pages 1027-54, November.
    4. Stulz, ReneM., 1990. "Managerial discretion and optimal financing policies," Journal of Financial Economics, Elsevier, Elsevier, vol. 26(1), pages 3-27, July.
    5. Chang, Chun, 1992. " Capital Structure as an Optimal Contract between Employees and Investors," Journal of Finance, American Finance Association, American Finance Association, vol. 47(3), pages 1141-58, July.
    6. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, American Economic Association, vol. 76(2), pages 323-29, May.
    7. Elazar Berkovitch & Ronen Israel & Yossef Spiegel, 2000. "Managerial Compensation and Capital Structure," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 9(4), pages 549-584, December.
    8. Oliver Hart & John Moore, 1991. "A Theory of Debt Based on the Inalienability of Human Capital," STICERD - Theoretical Economics Paper Series, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE /1991/233, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    9. Williamson, Oliver E, 1988. " Corporate Finance and Corporate Governance," Journal of Finance, American Finance Association, American Finance Association, vol. 43(3), pages 567-91, July.
    10. Jaggia, Priscilla Butt & Thakor, Anjan V, 1994. "Firm-Specific Human Capital and Optimal Capital Structure," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(2), pages 283-308, May.
    11. Aghion, Philippe & Bolton, Patrick, 1992. "An Incomplete Contracts Approach to Financial Contracting," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 59(3), pages 473-94, July.
    12. Jovanovic, Boyan, 1979. "Firm-specific Capital and Turnover," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(6), pages 1246-60, December.
    13. Felli, Leonardo & Harris, Christopher, 1996. "Learning, Wage Dynamics, and Firm-Specific Human Capital," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 104(4), pages 838-68, August.
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