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Decision rights, capital structure, and efficiency

Author

Listed:
  • Fioriti Andrés
  • Hernández Chanto Allan
  • Ordóñez Calafi Guillem

Abstract

Firms' issuance of non-linear securities, such as debt or options, creates risk-shifting incentives that may lead to inefficient outcomes. This widely accepted result relies on the assumption that firm decision rights (typically held by residual claimants) are unaffected by the issuance of such securities. In this paper, we relax this assumption and analyze a setting where cash flow rights and decision rights are allocated independently. Although payoffs are determined solely by rights over realized cash flows, decision rights hold value because they influence the probability distribution of those cash flows. This interdependence makes cash flow and decision rights substitutes. We demonstrate that their independent allocation leads to Pareto-superior outcomes and can restore efficiency.

Suggested Citation

  • Fioriti Andrés & Hernández Chanto Allan & Ordóñez Calafi Guillem, 2025. "Decision rights, capital structure, and efficiency," Asociación Argentina de Economía Política: Working Papers 4801, Asociación Argentina de Economía Política.
    • Handle: RePEc:aep:anales:4801
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    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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