@techreport{NBERw4886,
 title = "Debt and Seniority: An Analysis of the Role of Hard Claims in           Constraining Management",
 author = "Oliver Hart and John Moore",
 institution = "National Bureau of Economic Research",
 type = "Working Paper",
 series = "Working Paper Series",
 number = "4886",
 year = "1995",
 month = "August",
 URL = "http://www.nber.org/papers/w4886",
 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.},
}