Dividends and Debt with Managerial Agency and Lender Holdup
AbstractA well-known view in the literature is that if management is more concerned with the firm's survival than with profitability, it is efficient to use a levered capital structure and thereby transfer the liquidation decision to lenders. Our paper extends this idea to a setting where lenders behave opportunistically when they control the liquidation decision. We show that in this situation, an optimal mix of debt and dividends can mitigate the twin moral hazard problems of the manager and the lender. Given an otherwise optimal capital structure, initiating a dividend policy increases firm value, lowers debt payments, but raises total cash disbursementsÔinterest and dividendsÔto investors. Numerous other empirical implications of the model are also discussed.
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Bibliographic InfoArticle provided by INFORMS in its journal Management Science.
Volume (Year): 50 (2004)
Issue (Month): 9 (September)
dividends; capital structure; managerial agency; lender holdup;
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- Arroyo, Martín R., 2007. "Information Asymmetries, Credit Rationing And Banking Concentration: The Argentinean Case," MPRA Paper 10208, University Library of Munich, Germany.
- Arroyo, Martín R., 2007. "Banking concentration, information asymmetries and credit rationing: The Argentinean case," MPRA Paper 29968, University Library of Munich, Germany, revised 30 Mar 2011.
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