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Dividends and Debt with Managerial Agency and Lender Holdup

  • George Kanatas


    (Jones Graduate School of Administration, Rice University, 6100 South Main Street, Houston, Texas 77005-1892)

  • Jianping Qi


    (College of Business Administration, University of South Florida, 4202 East Fowler Avenue, BSN 3403, Tampa, Florida 33620-5500)

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    A well-known view in the literature is that if management is more concerned with the firm's survival than with profitability, it is efficient to use a levered capital structure and thereby transfer the liquidation decision to lenders. Our paper extends this idea to a setting where lenders behave opportunistically when they control the liquidation decision. We show that in this situation, an optimal mix of debt and dividends can mitigate the twin moral hazard problems of the manager and the lender. Given an otherwise optimal capital structure, initiating a dividend policy increases firm value, lowers debt payments, but raises total cash disbursementsÔinterest and dividendsÔto investors. Numerous other empirical implications of the model are also discussed.

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    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 50 (2004)
    Issue (Month): 9 (September)
    Pages: 1249-1260

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    Handle: RePEc:inm:ormnsc:v:50:y:2004:i:9:p:1249-1260
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