Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/85011
Authors: 
Admati, Anat R.
DeMarzo, Peter M.
Hellwig, Martin
Pfleiderer, Paul
Year of Publication: 
2013
Series/Report no.: 
Preprints of the Max Planck Institute for Research on Collective Goods 2013/13
Abstract: 
Shareholder-creditor conflicts can create leverage ratchet effects, resulting in inefficient capital structures. Once debt is in place, shareholders may inefficiently increase leverage but avoid reducing it no matter how beneficial leverage reduction might be to total firm value. We present conditions for an irrelevance result under which shareholders view asset sales, pure recapitalization and asset expansion with new equity as equally undesirable. We then analyze how seniority, asset heterogeneity, and asymmetric information affect shareholders´ choice of leverage-reduction method. Our results are particularly relevant to banking and highlight the benefit and importance of capital regulation to constrain inefficient excessive borrowing.
Document Type: 
Working Paper

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