Debt and Seniority: An Analysis of the Role of Hard Claims in Constraining Management / Oliver Hart, John Moore.

Format:

Book

Author/Creator:

Hart, Oliver.

Contributor:

National Bureau of Economic Research.

Moore, John.

Series:

Working Paper Series (National Bureau of Economic Research) no. w4886.

NBER working paper series no. w4886

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Debt and Seniority

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1994.

Summary:

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 contracts for controlling investment behavior.

Notes:

Print version record

October 1994.