NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Capital Structure Choice when Managers are in Control: Entrenchment versus Efficiency

Walter Novaes, Luigi Zingales

NBER Working Paper No. 5384
Issued in December 1995
NBER Program(s):Corporate Finance

Recent capital structure theories have emphasized the role of debt in minimizing the agency costs that arise from the separation between ownership and control. In this paper we argue that capital structure choices themselves are affected by the same agency problem. We show that, in general, the shareholders' and the manager's capital structure choices differ not only in their levels, but also in their sensitivities to the cost of financial distress and taxes. We argue that only the managerial perspective can explain why firms are generally reluctant to issue equity, why they issue it only following a stock price run-up, and why Corporate America recently deleveraged under the same tax system that supposedly generated the increase in leverage in the 1980s.

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Document Object Identifier (DOI): 10.3386/w5384

Published: Walter Novaes, 2003. "Capital Structure Choice When Managers Are in Control: Entrenchment versus Efficiency," Journal of Business, University of Chicago Press, vol. 76(1), pages 49-82, January. citation courtesy of

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