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Debt and Seniority: An Analysis of the Role of Hard Claims in Constraining Management

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  • Hart, Oliver
  • Moore, John

Abstract

The authors argue that long-term debt has a role in controlling management's ability to finance future investments. Companies with high (widely held) debt will find it hard to raise capital, since new security-holders will have low priority relative to existing creditors; conversely for companies with low debt. The authors show that there is an optimal debt-equity ratio and mix of senior and junior debt if management undertakes unprofitable as well as profitable investments. They derive conditions under which equity and a single class of senior long-term debt work as well as more complex contracts for controlling investment behavior. Copyright 1995 by American Economic Association.

Suggested Citation

  • Hart, Oliver & Moore, John, 1995. "Debt and Seniority: An Analysis of the Role of Hard Claims in Constraining Management," American Economic Review, American Economic Association, vol. 85(3), pages 567-585, June.
  • Handle: RePEc:aea:aecrev:v:85:y:1995:i:3:p:567-85
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    References listed on IDEAS

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    1. Sanford J. Grossman & Oliver D. Hart, 1982. "Corporate Financial Structure and Managerial Incentives," NBER Chapters, in: The Economics of Information and Uncertainty, pages 107-140, National Bureau of Economic Research, Inc.
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    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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