Can Managerial Discretion Explain Observed Leverage Ratios?

Can Managerial Discretion Explain Observed Leverage Ratios? This article analyzes the impact of managerial discretion and corporate control mechanisms on leverage and firm value within a contingent claims model where the manager derives perquisites from investment. Optimal capital structure reflects both the tax advantage of debt less bankruptcy costs and the agency costs of managerial discretion. Actual capital structure reflects the trade-off made by the manager between his empire-building desires and the need to ensure sufficient efficiency to prevent control challenges. The model shows that manager-shareholder conflicts can explain the low debt levels observed in practice. It also examines the impact of these conflicts on the cross-sectional variation in capital structures. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Review of Financial Studies Oxford University Press

Can Managerial Discretion Explain Observed Leverage Ratios?

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Publisher
Oxford University Press
Copyright
© 2004 The Society for Financial Studies
ISSN
0893-9454
eISSN
1465-7368
D.O.I.
10.1093/rfs/hhg036
Publisher site
See Article on Publisher Site

Abstract

This article analyzes the impact of managerial discretion and corporate control mechanisms on leverage and firm value within a contingent claims model where the manager derives perquisites from investment. Optimal capital structure reflects both the tax advantage of debt less bankruptcy costs and the agency costs of managerial discretion. Actual capital structure reflects the trade-off made by the manager between his empire-building desires and the need to ensure sufficient efficiency to prevent control challenges. The model shows that manager-shareholder conflicts can explain the low debt levels observed in practice. It also examines the impact of these conflicts on the cross-sectional variation in capital structures.

Journal

The Review of Financial StudiesOxford University Press

Published: Jan 1, 2004

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