The author analyzes optimal capital and ownership structures as resulting from anticipated future control contests. He focuses on leverage as a device that enables the incumbent management to extract the maximum value from the rival. He shows that firm value depends on both capital and ownership structures. The analysis leads to the following predictions: (1) more efficient managers use less debt, (2) firms facing better rivals for control issue more debt, and (3) firms with supermajority rules issue less debt. Several predictions are consistent with known empirical regularities. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

[I analyze optimal capital and ownership structures as resulting from anticipated future control contests. I focus on leverage as a device that enables the incumbent management to extract the maximum value from the rival. I show that firm value depends on both capital and ownership structures. The analysis leads to the following predictions: (i) more efficient managers use less debt, (ii) firms facing better rivals for control issue more debt, and (iii) firms with supermajority rules issue less debt. Several predictions are consistent with known empirical regularities.]

A capital structure theory based on corporate control considerations is presented. The optimal debt level balances a decrease in the probability of acquisition against a higher share of the synergy for the target's shareholders. This leads to the following implications: (i) the probability of firms becoming acquisition targets decreases with their leverage, (ii) acquirers' share of the total equity gain increases with targets' leverage, (iii) when acquisitions are initiated, targets' stock price, targets' debt value, and acquirers' firm value increase, and (iv) during the acquisition, target firms' stock price changes further; the expected change is zero and the variance decreases with targets' debt level.

A capital structure theory based on corporate control considerations is presented. The optimal debt level balances a decrease in the probability of acquisition against a higher share of the synergy for the target's shareholders. This leads to the following implications: (1) the probability of firms becoming acquisition targets decreases with their leverage; (2) acquirers' share of the total equity gain increases with targets' leverage; (3) when acquisitions are initiated, targets' stock price, targets' debt value, and acquirers' firm value increase; and (4) during the acquisition, target firms' stock price changes further; the expected change is zero and the variance decreases with targets' debt level.

A capital structure theory based on corporate control considerations is presented. The optimal debt level balances a decrease in the probability of acquisition against a higher share of the synergy for the target's shareholders. This leads to the following implications: (i) the probability of firms becoming acquisition targets decreases with their leverage, (ii) acquirers' share of the total equity gain increases with targets' leverage, (iii) when acquisitions are initiated, targets' stock price, targets' debt value, and acquirers' firm value increase, and (iv) during the acquisition, target firms' stock price changes further; the expected change is zero and the variance decreases with targets' debt level.

We consider the bankruptcy law and workout practices in the United States and model bankruptcy as a strategic decision. We analyze a firm's choice between liquidation under Chapter 7, renegotiation of the debt contract in a workout, and reorganization under Chapter 11 of the bankruptcy code. Our premise is that a financially distressed firm chooses its action in order to minimize the loss in value caused by the well-known over- and under-investment problems. We show that the firm initiates a workout when it faces under-investment, and commences Chapter 11 when it faces over-investment. Some of the results are: (i) in default, total firm value and equity value increase upon the announcement of a workout and decrease upon the announcement of Chapter 11; (ii) firms with shorter maturity of debt are more likely to reorganize in a workout; (iii) among the firms that renegotiate their debt contract, the proportion of firms entering Chapter 11 is higher for firms in mature industries than for firms in growth industries.

This article presents a theory of capital allocation that shows how the use of net present value (NPV) as an investment criterion leads to inefficient capital budgeting outcomes and how this criterion may be dominated by other capital budgeting criteria, like the internal rate of return and the profitability index. The essence of our theory is rooted in the mainstream paradigm of corporate finance: while firms use NPV to measure the addition to firm value from prospective projects, "classical" informational and agency considerations prevent it from implementing the optimal capital budgeting outcome. Our theory also identifies conditions when alternative criteria should be used. Finally, we characterize when direct monitoring through capital budgeting dominates compensation contracts in alleviating the agency problem.

This article presents a theory of capital allocation that shows how the use of net present value (NPV) as an investment criterion leads to inefficient capital budgeting outcomes and how this criterion may be dominated by other capital budgeting criteria, like the internal rate of return and the profitability index. The essence of our theory is rooted in the mainstream paradigm of corporate finance: while firms use NPV to measure the addition to firm value from prospective projects, "classical" informational and agency considerations prevent it from implementing the optimal capital budgeting outcome. Our theory also identifies conditions when alternative criteria should be used. Finally, we characterize when direct monitoring through capital budgeting dominates compensation contracts in alleviating the agency problem.

http://deepblue.lib.umich.edu/bitstream/2027.42/39533/3/wp143.pdf

[We model fundamental differences across economic systems and propose optimal bankruptcy laws. We show that creditor-debtor relationships in a given economy are affected by the ability of creditors to obtain information about fundamentals and the managers' ability to strategically use their private information. An optimal bankruptcy law utilizes creditors' information while minimizing managers' use of strategic information. Our proposed laws for a developed bank-based system like Germany include a creditor chapter only, for a developed market-based system like the United States include both a creditor chapter and a debtor chapter, and for an underdeveloped system include both a creditor chapter and a debtor chapter that gives the manager more protection than in a market-based system.]