Debt and Seniority: An Analysis of the Role of Hard Claims in Constraining Management

Oliver Hart and John Moore

No 4886, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We argue that long-term debt has a role in controlling management's ability to finance future investments. A company with high (widely-held) debt will find it hard to raise capital, since new security holders will have low priority relative to existing creditors. Conversely for a company with low debt. We show there is an optimal debt-equity ratio and mix of senior and junior debt if management undertakes unprofitable as well as profitable investments. We derive conditions under which equity and a single class of senior long-term debt work as well as more complex contracts for controlling investment behavior.

JEL-codes: C23 D23 (search for similar items in EconPapers)
Date: 1994-10
Note: CF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (147)

Published as American Economic Review, vol. 85, no. 3, pp. 567-585, (June 1995).

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Journal Article: Debt and Seniority: An Analysis of the Role of Hard Claims in Constraining Management (1995)
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