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Journal of Financial and Quantitative Analysis Vol. 61 No. 2 2026

Optimal Ownership and Capital Structure with Agency Conflicts

Yunzhi Hu1; Zhaojun Yang2; Nanhui Zhu3

1 University of North Carolina at Chapel Hill Kenan–Flagler Business School · 2 Southern University of Science and Technology Department of Finance · 3 University of International Business and Economics China School of Banking and Finance Southern University of Science and Technology

Abstract

We develop a continuous-time model examining agency conflicts among controlling shareholders (managers), minority shareholders, and creditors in corporate investment decisions. The manager’s private benefits encourage overinvestment, while their equity stake and debt overhang lead to underinvestment. We show these offsetting incentive effects can achieve optimal investment timing under certain conditions. Agency costs exhibit U-shaped relationships with private benefits, tax rates, volatility, managerial ownership, and leverage. The model reveals how the interplay among agency conflicts, tax benefits, and bankruptcy costs shapes optimal ownership and capital structure, explaining several documented empirical patterns in corporate finance.

DOI
10.1017/s0022109025101671
Volume
61
Issue
2
Pages
872-905
Language
en
Sources
openalex crossref

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