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Dividends and Debt with Managerial Agency and Lender Holdup

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • George Kanatas & Jianping Qi, 2004. "Dividends and Debt with Managerial Agency and Lender Holdup," Management Science, INFORMS, vol. 50(9), pages 1249-1260, September.
  • Handle: RePEc:inm:ormnsc:v:50:y:2004:i:9:p:1249-1260
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    File URL: http://dx.doi.org/10.1287/mnsc.1030.0183
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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.
    2. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    3. Woolridge, J Randall, 1983. " Dividend Changes and Security Prices," Journal of Finance, American Finance Association, vol. 38(5), pages 1607-1615, December.
    4. Gustavo Grullon & Roni Michaely & Bhaskaran Swaminathan, 2002. "Are Dividend Changes a Sign of Firm Maturity?," The Journal of Business, University of Chicago Press, vol. 75(3), pages 387-424, July.
    5. Sharpe, Steven A, 1990. " Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer Relationships," Journal of Finance, American Finance Association, vol. 45(4), pages 1069-1087, September.
    6. Philippe Aghion & Patrick Bolton, 1992. "An Incomplete Contracts Approach to Financial Contracting," Review of Economic Studies, Oxford University Press, vol. 59(3), pages 473-494.
    7. Kanatas, George & Qi, Jianping, 2001. "Imperfect Competition, Agency, and Financing Decisions," The Journal of Business, University of Chicago Press, vol. 74(2), pages 307-338, April.
    8. Chang, Chun, 1993. "Payout Policy, Capital Structure, and Compensation Contracts When Managers Value Control," Review of Financial Studies, Society for Financial Studies, vol. 6(4), pages 911-933.
    9. Easterbrook, Frank H, 1984. "Two Agency-Cost Explanations of Dividends," American Economic Review, American Economic Association, vol. 74(4), pages 650-659, September.
    10. Berlin, Mitchell & Loeys, Jan, 1988. " Bond Covenants and Delegated Monitoring," Journal of Finance, American Finance Association, vol. 43(2), pages 397-412, June.
    11. Harris, Milton & Raviv, Artur, 1990. " Capital Structure and the Informational Role of Debt," Journal of Finance, American Finance Association, vol. 45(2), pages 321-349, June.
    12. Rajan, Raghuram & Winton, Andrew, 1995. " Covenants and Collateral as Incentives to Monitor," Journal of Finance, American Finance Association, vol. 50(4), pages 1113-1146, September.
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    Cited by:

    1. Arroyo, Martín R., 2007. "Banking concentration, information asymmetries and credit rationing: The Argentinean case," MPRA Paper 29968, University Library of Munich, Germany, revised 30 Mar 2011.

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