Anat R. Admati; Peter M. DeMarzo; Martin F. Hellwig; Paul Pfleiderer;
Publisher: Max Planck Institute for Research on Collective Goods
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 f... View more
7 We allow for the possibility of subsidies because of their importance in the recent financial crisis.
8 There may be other direct effects of leverage on cash flows; e.g., the firm may have to pay higher wages as in Berk, et al. (2010), or have reduced costs due to disciplining as argued by Jensen (1986). We can adjust t and n to embody other such direct consequences of leverage on free cash flows.
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