The disciplinary role of debt and equity contracts: Theory and tests
نویسنده
چکیده
We study how equity and debt contracts commit investors to discipline managers. Our model shows that the optimal allocation of debt, equity, and control rights depends on which disciplinary action is more efficient. When the efficient action is managerial replacement, then control rights should be allocated to equity holders, and capital structure should consist of equity and long-term debt. When the efficient action is liquidation, then control rights can be allocated to the manager, and capital structure should consist of equity and short-term debt. We find empirical support to the model’s predictions in a sample of leveraged buyout transactions. © 2006 Elsevier Inc. All rights reserved. JEL classification: G32; G33; G34
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