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research article

Can managerial discretion explain observed leverage ratios

Morellec, Erwan  
2004
Review of Financial Studies

This article analyzes the impact of managerial discretion and corporate control mechanisms on leverage and firm value within a contingent claims model where the manager derives perquisites from investment. Optimal capital structure reflects both the tax advantage of debt less bankruptcy costs and the agency costs of managerial discretion. Actual capital structure reflects the trade-off made by the manager between his empire-building desires and the need to ensure sufficient efficiency to prevent control challenges. The model shows that manager-shareholder conflicts can explain the low debt levels observed in practice. It also examines the impact of these conflicts on the cross-sectional variation in capital structures.

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Type
research article
DOI
10.1093/rfs/hhg036
Author(s)
Morellec, Erwan  
Date Issued

2004

Publisher

Oxford University Press

Published in
Review of Financial Studies
Volume

17

Start page

257

End page

294

Note

Managerial discretion reduces leverage and creates a link between financing and growth options.

Editorial or Peer reviewed

REVIEWED

Written at

EPFL

EPFL units
SFI-EM  
Available on Infoscience
April 24, 2010
Use this identifier to reference this record
https://infoscience.epfl.ch/handle/20.500.14299/49662
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