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Managerial Entrenchment and the Choice of Debt Financing
Author:
Mr. Amadou N Sy
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Series:
IMF Working Papers
Volume/Issue:
Volume 1999: Issue 094
Language:
English
Publication Date:
01 Jul 1999
DOI:
https://doi.org/10.5089/9781451851700.001
ISBN:
9781451851700
ISSN:
1018-5941
Pages:
29
Keywords:
WP; short-term debt; marginal revenue; capital structure
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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The paper analyzes the choice between public and private debt by an entrenched manager. The model shows that when the firm’s credit risk is low, management issues public bonds because of the value gains from increased flexibility rather than reduced restrictions and monitoring. In fact, management’s expected private gains decrease as initial private debt restrictions are selectively relaxed. In contrast, when credit risk is high, management issues private debt because of the value gains and private benefits from renegotiating more stringent restrictions. When the maturity of private debt is shortened, however, privately and publicly placed bonds can be preferred to bank debt.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund