TY  - JOUR
AU  - Atkeson, Andrew
AU  - Cole, Harold
TI  - A Dynamic Theory of Optimal Capital Structure and Executive Compensation
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11083
PY  - 2005
Y2  - January 2005
DO  - 10.3386/w11083
UR  - http://www.nber.org/papers/w11083
L1  - http://www.nber.org/papers/w11083.pdf
N1  - Author contact info:
Andrew Atkeson
Bunche Hall 9381
Department of Economics
UCLA
Box 951477
Los Angeles, CA  90095-1477
Tel: 866/312-9770
Fax: 310/825-9528
E-Mail: andy@atkeson.net

Harold L. Cole
Economics Department
University of Pennsylvania
3718 Locust Walk
160 McNeil Building
Philadelphia, PA 19104
Tel: 215-898-7788
E-Mail: colehl@sas.upenn.edu
AB  - We put forward a theory of the optimal capital structure of the firm based on Jensen's (1986) hypothesis that a firm's choice of capital structure is determined by a trade-off between agency costs and monitoring costs. We model this tradeoff dynamically. We assume that early on in the production process, outside investors face an informational friction with respect to withdrawing funds from the firm which dissipates over time. We assume that they also face an agency friction which increases over time with respect to funds left inside the firm. The problem of determining the optimal capital structure of the firm as well as the optimal compensation of the manager is then a problem of choosing payments to outside investors and the manager at each stage of production to balance these two frictions.
ER  -