Walter Novaes (Pontifical Catholic University (PUC-Rio))
Abstract
In the free-cash-flow theory, shareholders use debt to discipline managers and maximize firm value. In contrast, managerial models assume that, without a takeover threat, managers will not lever up to constrain themselves. This article demonstrates that a takeover threat is unlikely to reconcile these two theories. In particular, with low takeover costs, target managers may overlever. Yet, both theories are consistent with recent papers that document a negative correlation between leverage and takeover costs. I propose a test of the two theories by showing that, in the value-maximizing approach, antitakeover amendments reduce the sensitivity of leverage to entrenchment-related variables.
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Article provided by University of Chicago Press in its journal Journal of Business.
Volume (Year): 76 (2003) Issue (Month): 1 (January) Pages: 49-82 Download reference. The following formats are available: HTML
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