Capital Structure Choice When Managers Are in Control: Entrenchment versus Efficiency

Walter Novaes

The Journal of Business, 2003, vol. 76, issue 1, 49-82

Abstract: In the free-cash-flow theory, shareholders use debt to discipline managers and maximize firm value. In contrast, managerial models assume that, without a takeover threat, managers will not lever up to constrain themselves. This article demonstrates that a takeover threat is unlikely to reconcile these two theories. In particular, with low takeover costs, target managers may overlever. Yet, both theories are consistent with recent papers that document a negative correlation between leverage and takeover costs. I propose a test of the two theories by showing that, in the value-maximizing approach, antitakeover amendments reduce the sensitivity of leverage to entrenchment-related variables.

Date: 2003
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Working Paper: Capital Structure Choice when Managers are in Control: Entrenchment versus Efficiency (1995)
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Persistent link: https://EconPapers.repec.org/RePEc:ucp:jnlbus:v:76:y:2003:i:1:p:49-82

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