TY  - JOUR
AU  - Hart,Oliver
AU  - Moore,John
TI  - Debt and Seniority: An Analysis of the Role of Hard Claims in           Constraining Management
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4886
PY  - 1995
Y2  - August 1995
UR  - http://www.nber.org/papers/w4886
L1  - http://www.nber.org/papers/w4886.pdf
N1  - Author contact info:
Oliver D. Hart
Department of Economics
Littauer Center 220
Harvard University
Cambridge, MA 02138
Tel: 617/496-3461
Fax: 617-495-7730
E-Mail: ohart@harvard.edu

John Moore
William Robertson Building
Edinburgh
Scotland, EH8 9JY
U.K.
E-Mail: j.h.moore@ed.ac.uk
AB  - 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.
ER  -