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A Bargaining Theory of the Leverage-Profitability Relationship

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  • Paolo Panteghini

Abstract

This paper extends the Leland trade-off model by introducing shareholder creditor bargaining over the perpetual debt coupon. A single parameter ϕ ∈ (0, 1) measures shareholder bargaining power and indexes the deviation of the negotiated coupon from the firm-value-maximising level. The main result is sharp: at the parity configuration ϕ = 1/2, the bargaining solution exactly recovers the Leland firm-value optimum, irrespective of every other parameter of the model. Deviations from parity generate a structural wedge whose direction is signed by ϕ − 1/2. When shareholders dominate (ϕ > 1/2), the negotiated coupon undershoots the value-maximising level and increases in shareholder power push leverage down while pushing earnings yield up, generating the negative leverage–profitability slope documented since Titman & Wessels (1988). When creditors dominate (ϕ

Suggested Citation

  • Paolo Panteghini, 2026. "A Bargaining Theory of the Leverage-Profitability Relationship," CESifo Working Paper Series 12639, CESifo.
    • Handle: RePEc:ces:ceswps:_12639
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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
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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