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Long‐term Investments and Financial Structure

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  • Noriyuki Yanagawa

Abstract

This paper examines how the financial structure of a firm affects the incentives of managers to act myopically. The paper shows that managers tend to choose investments that pay off too quickly if there is a possibility that shareholders will fire the managers in the future. However, this problem can be avoided if firms are appropriately financed. Since the gains from firing the managers accrue first to the creditors, the shareholders’ incentive to fire the managers is reduced when the firm increases its debt ratio. The firm should thus choose an optimal financial structure to ensure that the level of incentive for shareholders to dismiss managers is appropriately controlled.

Suggested Citation

  • Noriyuki Yanagawa, 2000. "Long‐term Investments and Financial Structure," International Review of Finance, International Review of Finance Ltd., vol. 1(1), pages 39-51, March.
    • Handle: RePEc:bla:irvfin:v:1:y:2000:i:1:p:39-51
    DOI: 10.1111/1468-2443.00004
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    Cited by:

    1. Aktham Maghyereh, 2005. "Dynamic Capital Structure: Evidence From The Small Developing Country Of Jordan," IIUM Journal of Economics and Management, IIUM Journal of Economis and Management, vol. 13(1), pages 1-32, June.

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