Year: 1994
Type: report
Abstract: We argue that long-term debt has a role in controlling management's ability to finance future investments.A company with high (widely-held) debt will find it hard to raise capital.since new security holders will have low priority relative to existing creditors.Conversely for a company with low debt We show there is an optimal debt-equity ratio and mix of senior and junior debt if management undertakes unprofitable as well as profitable investments.We derive conditions under which equity and a single class of senior long-term debt work as well as more complex conuacts for controlling investment behavior.
DOI: 10.3386/w4886
Authors: Oliver Hart, John Moore
Language: English
Subfield: Accounting
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W1567448068