- Capital structure as a bargaining tool : the role of leverage in contract renegotiation
- American Economic Review
- Volume | Issue number
- 83 | 5
- Pages (from-to)
- Document type
- Faculty of Economics and Business (FEB)
- Amsterdam Business School Research Institute (ABS-RI)
This paper presents a strategic model of temporarily high leverage. When the repayment of senior claims depends in part upon further investment, shareholders may be able to alter credibly their incentives to invest through an exchange of junior debt for equity and thereby force concessions from senior creditors. We focus on the conflict between shareholders and risk-averse workers and show that this strategic use of debt leads to an inefficient allocation of risk. We characterize conditions under which firms will undergo leveraged recapitalizations, their choice of debt instruments, and the dynamics of their capital structure.
If you believe that digital publication of certain material infringes any of your rights or (privacy) interests, please let the Library know, stating your reasons. In case of a legitimate complaint, the Library will make the material inaccessible and/or remove it from the website. Please Ask the Library, or send a letter to: Library of the University of Amsterdam, Secretariat, Singel 425, 1012 WP Amsterdam, The Netherlands. You will be contacted as soon as possible.