TY  - JOUR
AU  - Novaes,Walter
AU  - Zingales,Luigi
TI  - Capital Structure Choice when Managers are in Control: Entrenchment     versus Efficiency
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5384
PY  - 1995
Y2  - December 1995
UR  - http://www.nber.org/papers/w5384
L1  - http://www.nber.org/papers/w5384.pdf
N1  - Author contact info:
Walter Novaes
PUC-Rio
E-Mail: novaes@econ.puc-rio.br

Luigi Zingales
Booth School of Business
The University of Chicago
5807 S. Woodlawn Avenue
Chicago, IL 60637
Tel: 773/702-3196
Fax: 773/834-2081
E-Mail: luigi.zingales@ChicagoBooth.edu
AB  - 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.
ER  -