publication . Other literature type . Article . 2011

Optimal Priority Structure, Capital Structure, and Investment

Dirk Hackbarth; David C. Mauer;
  • Published: 13 Dec 2011
  • Publisher: Oxford University Press (OUP)
Abstract
We study the interaction between financing and investment decisions in a dynamic model, where the firm has multiple debt issues and equityholders choose the timing of investment. Jointly optimal capital and priority structures can virtually eliminate investment distortions because debt priority serves as a dynamically optimal contract. Examining the relative efficiency of priority rules observed in practice, we develop several predictions about how firms adjust their priority structure in response to changes in leverage, credit conditions, and firm fundamentals. Notably, financially unconstrained firms with few growth opportunities prefer senior debt, while fina...
Subjects
free text keywords: Debt levels and flows, Internal debt, Debt-to-GDP ratio, Economics, Capital structure, Debt, media_common.quotation_subject, media_common, Investment decisions, Financial economics, Finance, business.industry, business, External debt, Senior debt
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publication . Other literature type . Article . 2011

Optimal Priority Structure, Capital Structure, and Investment

Dirk Hackbarth; David C. Mauer;