Capital Structure with Multiple Investors
We study the problem of financial contracting between a firm and outside investors when the firm cannot commit to future payouts, but assets can be contracted upon. By analyzing the renegotiation between firm and investors in default, we show that a capital structure with multiple investors specializing in short-term and long-term claims is superior to a structure with only one type of claim. By separating their claims over time and by giving the holder of short-term claims the right to liquidate assets when debt repayments are not met, investors can harden the incentives for the entrepreneur to renegotiate the contract ex post. Depending on the parameters, the optimal capital structure also differentiates between state-independent and state-dependent long- term claims, which can be interpreted as long-term debt and equity. We derive implications for the role of firm size, bargaining power, asset maturity structure, and managerial incentive schemes.
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