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Capital Structure and Corporate Financial Policy

In: Competition and Finance

Author

Listed:
  • Kevin Dowd

    (Sheffield Hallam University)

Abstract

Chapter 2 looked at the basics of contract theory in a setting with two classes of agent. This chapter builds upon that discussion by extending the treatment of contracting theory to encompass contracts involving three or more types of agent. Instead of there being just equity-holders and a single class of undifferentiated debtholders, we now consider cases where there might be equity-holders and two classes of debt-holder (i.e., one with a senior repayment claim on the firm and one with a junior claim), or where the manager of a debt-issuing firm is no longer sole owner, and so we have two types of equity-holder — the inside holder (i.e., the manager) and the outside equity-holder (i.e., the other equity-holder(s)) — as well as the debt-holder. Indeed, we often have situations where there is inside and outside equity as well as junior and senior debt, and we frequently get cases where the firm issues other types of financial instrument as well (e.g., subordinated debt).

Suggested Citation

  • Kevin Dowd, 1996. "Capital Structure and Corporate Financial Policy," Palgrave Macmillan Books, in: Competition and Finance, chapter 3, pages 76-113, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-349-24856-8_3
    DOI: 10.1007/978-1-349-24856-8_3
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