Capital Structure as an Optimal Contract Between Employees and Investors

Capital Structure as an Optimal Contract Between Employees and Investors ABSTRACT The ex ante optimal contract between investors and employees is derived endogenously and is interpreted in terms of debt, equity, and employees' compensation. Although public equity financing is feasible in this model through verified accounting income, debt is needed to force value‐enhancing restructuring before the income realizes. The optimal debt level, however, is lower than that which maximizes the value of the firm when there is nonmonetary restructuring‐related cost to employees. The paper explains how stock prices react to exchange offers, how earnings can be diluted by a decrease in leverage, and why employees' claims are generally senior to those of investors. New testable implications about leverage and compensation levels are derived. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

Capital Structure as an Optimal Contract Between Employees and Investors

The Journal of Finance, Volume 47 (3) – Jul 1, 1992

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Publisher
Wiley
Copyright
1992 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
D.O.I.
10.1111/j.1540-6261.1992.tb04008.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT The ex ante optimal contract between investors and employees is derived endogenously and is interpreted in terms of debt, equity, and employees' compensation. Although public equity financing is feasible in this model through verified accounting income, debt is needed to force value‐enhancing restructuring before the income realizes. The optimal debt level, however, is lower than that which maximizes the value of the firm when there is nonmonetary restructuring‐related cost to employees. The paper explains how stock prices react to exchange offers, how earnings can be diluted by a decrease in leverage, and why employees' claims are generally senior to those of investors. New testable implications about leverage and compensation levels are derived.

Journal

The Journal of FinanceWiley

Published: Jul 1, 1992

References

  • Information effects associated with debt‐for‐equity and equity‐for‐debt exchange offers
    Cornett, Cornett; Travlos, Travlos
  • Capital structure and the informational role of debt
    Harris, Harris; Raviv, Raviv
  • Optimal financial instruments
    Zender, Zender

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