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Dynamic Capital Structure under Managerial Entrenchment: Evidence from a Structural Estimation


  • Erwan MORELLEC

    (Ecole Polytechnique Federale de Lausanne (EPFL), Swiss Finance Institute and CEPR)

  • Boris NIKOLOV

    (University of Lausanne and Swiss Finance Institute)

  • Norman SCHURHOFF

    (University of Lausanne and Swiss Finance Institute)


This paper examines the impact of managerial entrenchment on corporate financing decisions. We build a dynamic contingent claims model in which financing policy results from a trade-off between tax benefits, agency conflicts, and contracting frictions. In our setting, managers do not act in the best interest of shareholders, but rather pursue private benefits at the expense of shareholders. Managers have discretion over financing and dividend policies. However, shareholders can remove the manager at a cost. Our analysis demonstrates that entrenched managers restructure less frequently and issue less debt than optimal for shareholders. We take the model to the data and use observed financing choices to provide firm-specific estimates of the degree of managerial entrenchment. Using structural econometrics, we find that costs of control challenges of 2-7% on average (.8- 5% at median) are sufficient to resolve the low-and zero-leverage puzzles and explain the time series of observed leverage ratios. Our estimates of the agency costs vary with variables that one expects to determine managerial incentives. Governance mechanisms significantly affect the value of control and firms’ financing decisions.

Suggested Citation

  • Erwan MORELLEC & Boris NIKOLOV & Norman SCHURHOFF, "undated". "Dynamic Capital Structure under Managerial Entrenchment: Evidence from a Structural Estimation," Swiss Finance Institute Research Paper Series 09-10, Swiss Finance Institute.
  • Handle: RePEc:chf:rpseri:rp0910

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    Cited by:

    1. Pawlina, Grzegorz, 2010. "Underinvestment, capital structure and strategic debt restructuring," Journal of Corporate Finance, Elsevier, vol. 16(5), pages 679-702, December.

    More about this item


    dynamic capital structure; private benefits of control; structural estimation;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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