Journal of Corporate Finance Vol. 7 No. 1 2001
Managerial replacement and corporate financial policy with endogenous manager-specific value
Abstract
This paper studies financial policy, investment decisions and the threat of dismissal when managers value control and investments generate manager-specific value. A high probability of investigation focuses the manager on the profitability of replacement and therefore manager-specific value. The probability of an investigation increases when the firm enters bankruptcy. Thus, high debt levels focus the manager on investments that dissuade replacement during bankruptcy procedures. Dividends relax the manager's focus on manager-specific value since there is a lower probability of an investigation following a missed dividend. The ability to make dividend payments, however, is related to ex-post performance and can improve replacement decisions. When managerial quality is commonly known, the expected value of the firm is maximized with a combination of debt and dividend commitments. When managerial quality is hidden information, it is optimal for the combination of debt and dividend commitments to signal quality.
- DOI
- 10.1016/s0929-1199(00)00018-3
- Volume
- 7
- Issue
- 1
- Pages
- 25-52
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref