This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Managerial Preferences, Corporate Governance, and Financial Structure

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Hong Liu (Olin School of Business,Washington University in Saint Louis)
Jianjun Miao () (Boston University, Department of Economics)
Abstract

Conflicts of interest between insiders (e.g, controlling shareholders) and outsiders (e.g., minority shareholders) are central to the analysis of modern corporation. In an integrated continuous-time contingent claims framework with imperfect corporate governance, we examine a controlling shareholder’s optimal choice of capital structure, ownership concentration, private benefit diversion, consumption, and financial market investment. We derive solutions in explicit parametric forms up to numerical integrations. In addition to generating implications consistent with existing empirical evidence, we also show that managerial preference characteristics (such as risk aversion and impatience), corporate governance, and financial market are important determinants of equity value, credit spread, agency costs, capital structure, and ownership concentration. Our model produces many novel empirically testable predictions. For example, it implies that a more risk averse or a less impatient entrepreneur issues less debt and more equity, and that stronger corporate governance leads to higher equity value, lower leverage, less ownership concentration, and lower credit spread. In addition, it also suggests that as the Sharpe ratio in the financial market increases, firm leverage ratio, agency costs, and credit spread all increase.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://people.bu.edu/miaoj/optdebt19.pdf
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2006-020.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length: 46 pages
Date of creation: Mar 2006
Date of revision:
Handle: RePEc:bos:wpaper:wp2006-020

Contact details of provider:
Postal: 270 Bay State Road, Boston, MA 02215
Phone: 617-353-4389
Fax: 617-353-444
Web page: http://www.bu.edu/econ/
More information through EDIRC

For technical questions regarding this item, or to correct its listing, contact: (Ashley Seamans).

Related research
Keywords: Managerial/entrepreneurial characteristics; ownership and capital structure; private benefits of control; corporate governance;

Find related papers by JEL classification:
D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Rafael La porta & Florencio Lopez-De-Silanes & Andrei Shleifer & Robert Vishny, 2002. "Investor Protection and Corporate Valuation," Journal of Finance, American Finance Association, vol. 57(3), pages 1147-1170, 06. [Downloadable!] (restricted)
    Other versions:
  2. Brennan, Michael J & Schwartz, Edwardo S, 1978. "Corporate Income Taxes, Valuation, and the Problem of Optimal Capital Structure," Journal of Business, University of Chicago Press, vol. 51(1), pages 103-14, January. [Downloadable!] (restricted)
  3. Hayne E. Leland., 1998. "Agency Costs, Risk Management, and Capital Structure," Research Program in Finance Working Papers RPF-278, University of California at Berkeley. [Downloadable!]
    Other versions:
  4. Jianjun Miao, 2005. "Optimal Capital Structure and Industry Dynamics," Journal of Finance, American Finance Association, vol. 60(6), pages 2621-2659, December. [Downloadable!] (restricted)
    Other versions:
  5. Philip H. Dybvig & Chi-fu Huang, 1988. "Nonnegative Wealth, Absence of Arbitrage, and Feasible Consumption Plans," Cowles Foundation Discussion Papers 860, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
  6. Robert Parrino & Allen M. Poteshman & Michael S. Weisbach, 2005. "Measuring Investment Distortions when Risk-Averse Managers Decide Whether to Undertake Risky Projects," Financial Management, Financial Management Association, vol. 34(1), Spring.
    Other versions:
  7. Fries, Steven & Miller, Marcus & Perraudin, William, 1997. "Debt in Industry Equilibrium," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 10(1), pages 39-67.
  8. Rajan, Raghuram G & Zingales, Luigi, 1995. " What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-60, December. [Downloadable!] (restricted)
    Other versions:
  9. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May. [Downloadable!] (restricted)
  10. Cadenillas, Abel & Cvitanic, Jaksa & Zapatero, Fernando, 2004. "Leverage decision and manager compensation with choice of effort and volatility," Journal of Financial Economics, Elsevier, vol. 73(1), pages 71-92, July. [Downloadable!] (restricted)
  11. Stephen A. Ross, 1977. "The Determination of Financial Structure: The Incentive-Signalling Approach," Bell Journal of Economics, The RAND Corporation, vol. 8(1), pages 23-40, Spring. [Downloadable!] (restricted)
  12. Pascal Francois, 2004. "Capital Structure and Asset Prices: Some Effects of Bankruptcy Procedures," Journal of Business, University of Chicago Press, vol. 77(2), pages 387-412, April. [Downloadable!]
  13. Berger, Philip G & Ofek, Eli & Yermack, David L, 1997. " Managerial Entrenchment and Capital Structure Decisions," Journal of Finance, American Finance Association, vol. 52(4), pages 1411-38, September. [Downloadable!] (restricted)
    Other versions:
  14. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October. [Downloadable!] (restricted)
  15. Shleifer, Andrei & Wolfenzon, Daniel, 2002. "Investor protection and equity markets," Journal of Financial Economics, Elsevier, vol. 66(1), pages 3-27, October. [Downloadable!] (restricted)
    Other versions:
  16. Pierre Collin-Dufresne, 2001. "Do Credit Spreads Reflect Stationary Leverage Ratios?," Journal of Finance, American Finance Association, vol. 56(5), pages 1929-1957, October. [Downloadable!] (restricted)
  17. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring. [Downloadable!] (restricted)
  18. Mello, Antonio S & Parsons, John E, 1992. " Measuring the Agency Cost of Debt," Journal of Finance, American Finance Association, vol. 47(5), pages 1887-904, December. [Downloadable!] (restricted)
  19. Gilson, Stuart C, 1997. " Transactions Costs and Capital Structure Choice: Evidence from Financially Distressed Firms," Journal of Finance, American Finance Association, vol. 52(1), pages 161-96, March. [Downloadable!] (restricted)
  20. Duffie, Darrell & Lando, David, 2001. "Term Structures of Credit Spreads with Incomplete Accounting Information," Econometrica, Econometric Society, vol. 69(3), pages 633-64, May.
  21. Leland, Hayne E & Toft, Klaus Bjerre, 1996. " Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads," Journal of Finance, American Finance Association, vol. 51(3), pages 987-1019, July. [Downloadable!] (restricted)
    Other versions:
  22. Lambrecht, Bart M, 2001. "The Impact of Debt Financing on Entry and Exit in a Duopoly," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 14(3), pages 765-804.
  23. Goldstein, Robert & Ju, Nengjiu & Leland, Hayne, 2001. "An EBIT-Based Model of Dynamic Capital Structure," Journal of Business, University of Chicago Press, vol. 74(4), pages 483-512, October. [Downloadable!] (restricted)
  24. Fischer, Edwin O & Heinkel, Robert & Zechner, Josef, 1989. " Dynamic Capital Structure Choice: Theory and Tests," Journal of Finance, American Finance Association, vol. 44(1), pages 19-40, March. [Downloadable!] (restricted)
  25. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November. [Downloadable!] (restricted)
  26. Shleifer, Andrei & Vishny, Robert W, 1997. " A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-83, June. [Downloadable!] (restricted)
    Other versions:
  27. Leland, Hayne E, 1994. " Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 49(4), pages 1213-52, September. [Downloadable!] (restricted)
    Other versions:
  28. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June. [Downloadable!] (restricted)
  29. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December. [Downloadable!] (restricted)
    Other versions:
  30. Black, Fischer & Cox, John C, 1976. "Valuing Corporate Securities: Some Effects of Bond Indenture Provisions," Journal of Finance, American Finance Association, vol. 31(2), pages 351-67, May. [Downloadable!] (restricted)
  31. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May. [Downloadable!] (restricted)
    Other versions:
  32. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December. [Downloadable!] (restricted)
    Other versions:
  33. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May. [Downloadable!] (restricted)
  34. Erwan Morellec, 2004. "Can Managerial Discretion Explain Observed Leverage Ratios?," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 17(1), pages 257-294. [Downloadable!] (restricted)
  35. Rafael La Porta & Florencio Lopez-De-Silanes & Andrei Shleifer, 1999. "Corporate Ownership Around the World," Journal of Finance, American Finance Association, vol. 54(2), pages 471-517, 04. [Downloadable!] (restricted)
    Other versions:
  36. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 2000. "Investor protection and corporate governance," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 3-27. [Downloadable!] (restricted)
    Other versions:
  37. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November. [Downloadable!] (restricted)
  38. Parrino, Robert & Weisbach, Michael S., 1999. "Measuring investment distortions arising from stockholder-bondholder conflicts," Journal of Financial Economics, Elsevier, vol. 53(1), pages 3-42, July. [Downloadable!] (restricted)
Full references

Statistics
Access and download statistics

Did you know? Authors can create their own profile with links to their works on the RePEc Author Service.

This page was last updated on 2009-12-1.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.