 Moral hazard, debt overhang and capital structureBo Yang, Liu Gan and Chunhui Wen The North American Journal of Economics and Finance, 2021, vol. 58, issue C Abstract: This paper investigates the impact of managerial moral hazard on the debt overhang of a firm by constructing a contingent claims model in which the manager faces costly effort. Using a calibrated capital structure model, we show that the costs of debt overhang become more serious in the presence of managerial moral hazard. Such costs even account for more than half of the total agency costs at a high level of cash flow. Moreover, in contrast to the results of Hackbarth and Mauer (2012), our model predicts a U-shaped relationship between the leverage ratio and investment opportunities of a firm, which is caused by managers’ moral hazard. Finally, by considering this moral hazard, we also show the coexistence of low leverage ratios and high credit spreads, which explains the phenomenon of “low debt levels and high credit spreads” observed in practice. Keywords: Moral hazard; Agency costs; Debt overhang; Optimal capital structure (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:58:y:2021:i:c:s1062940821001509 DOI: 10.1016/j.najef.2021.101538 Access Statistics for this article The North American Journal of Economics and Finance is currently edited by Hamid Beladi More articles in The North American Journal of Economics and Finance from Elsevier |
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