| Abstract: | This article analyzes the impact of managerial discretion andcorporate control mechanisms on leverage and firm value withina contingent claims model where the manager derives perquisitesfrom investment. Optimal capital structure reflects both thetax advantage of debt less bankruptcy costs and the agency costsof managerial discretion. Actual capital structure reflectsthe trade-off made by the manager between his empire-buildingdesires and the need to ensure sufficient efficiency to preventcontrol challenges. The model shows that manager-shareholderconflicts can explain the low debt levels observed in practice.It also examines the impact of these conflicts on the cross-sectionalvariation in capital structures. |
