Competing Stakeholders’ Interests in Capital Structure Optimization Processes

Arbel Rosenthal (), Meirav Kramer () and Adam H. Ross ()

Journal of Management World, 2023, vol. 2023, issue 4, 1-14

Abstract: Capital structure decisions impact stakeholder groups differently. The review indicates that there is no universal capital structure theory that comprehensively explains the real-world financing behavior of firms and the capital structure enterprise performance nexus. In other words, the capital structure puzzle is still unsolved in corporate finance literature. This research extends the classic optimal capital structure model to the case of moral hazard based on the principal-agent problem, where the firm's output dynamically depends on the agent's efforts. The authors develop a dynamic capital structure model to study how agency conflicts between managers and debtholders affect the joint determination of financing and investment decisions. The suggested framework can be applied for quantitative estimates of optimal capital structure, provides explicit advice on optimal long-term debt and equity level and will be useful to produce a firm-specific recommendation. Overall, this paper extends capital structure literature from the perspective of seeking the most efficient and effective ways of interaction between the debtholder and the manager who acts on behalf of the shareholder. The results obtained can be useful to build further successful organizational management strategy.

Keywords: Management Decision Modeling; Corporate Governance Mechanism; Capital Structure Decisions; Dynamic Contract Theory; Structural Estimation (search for similar items in EconPapers)
Date: 2023
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