Managerial Entrenchment and the Choice of Debt Financing

July 1, 1999

Preview Citation

Format: Chicago

Amadou N Sy. Managerial Entrenchment and the Choice of Debt Financing, (USA: International Monetary Fund, 1999) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The paper analyzes the choice between public and private debt by an entrenched manager. The model shows that when the firm’s credit risk is low, management issues public bonds because of the value gains from increased flexibility rather than reduced restrictions and monitoring. In fact, management’s expected private gains decrease as initial private debt restrictions are selectively relaxed. In contrast, when credit risk is high, management issues private debt because of the value gains and private benefits from renegotiating more stringent restrictions. When the maturity of private debt is shortened, however, privately and publicly placed bonds can be preferred to bank debt.

Subject: Credit risk, Debt financing, Debt renegotiation, Private debt, Public debt

Keywords: Capital structure, Marginal revenue, Short-term debt, WP

Publication Details

Pages:

29
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1999/094
Stock No:

WPIEA0941999
ISBN:

9781451851700
ISSN:

1018-5941

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