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Specific Human Capital, Credible Commitment and Optimal Capital Structure

Author

Listed:
  • Xiaozu Wang

    (School of Management, Fudan University)

  • Tian Zhu

    (Division of Social Science, Hong Kong University of Science and Technology)

Abstract

In this paper, we show that although ex ante equityholders would like to adopt an optimal displacement and operating policy, they may not have incentives to implement such a policy ex post when the manager acquires firmspecific human capital and becomes indispensable to the firm¡¯s continued operation. An optimal mix of debt and equity can serve as a commitment device in disciplining the manager.

Suggested Citation

  • Xiaozu Wang & Tian Zhu, 2004. "Specific Human Capital, Credible Commitment and Optimal Capital Structure," Annals of Economics and Finance, Society for AEF, vol. 5(1), pages 47-59, May.
    • Handle: RePEc:cuf:journl:y:2004:v:5:i:1:p:47-59
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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