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Good cop,bad cop: Complementarities between debt and equity in disciplining management
Institution:1. Toulouse School of Economics, 21, allée de Brienne, 31000 Toulouse, France;2. Harvard Business School, Baker Library 345, Soldiers Field Road, Boston, MA 02163, United States;3. CEPR, 77 Bastwick Street, London, EC1V 3PZ, UK;1. Department of Mechanical Engineering, Universidad Técnica Federico Santa Maria, Av. España 1680, Valparaíso, Chile;2. Department of Mechanical Engineering, Universidad Autónoma del Caribe, Calle 90 No. 46-112, Barranquilla, Colombia;1. Research Department, Financial Stability Wing, Norges Bank (Central Bank of Norway), Bankplassen 2, P.O. Box 1179 Sentrum, 0107 Oslo, Norway;2. Market Infrastructure Division, Financial Stability, Bank of England, Threadneedle Street, London EC2R 8AH, United Kingdom;1. School of Physics and Materials Engineering, Dalian Nationalities University, Dalian 116600, China;2. Department of Physics, Hangzhou Normal University, Hangzhou, Zhejiang 310036, China;3. School of Science, Zhejiang University of Science and Technology, Hangzhou, Zhejiang 310023, China;4. School of Physics and Optoelectronic Technology, Dalian University of Technology, Dalian 116024, China;1. Department of Economics, Carleton University, Canada;2. School of Accounting and Finance, University of Waterloo, Canada;1. Laboratório de Psicologia Experimental, Departamento de Biociências, Universidade Federal de São Paulo, Av. D. Ana Costa, 95, Santos, SP 11060-001, Brazil;2. Departamento de Psicobiologia, Universidade Federal de São Paulo, São Paulo, Brazil;1. Institute for Coastal Science and Policy, 250 Flanagan Building, East Carolina University, Greenville, NC 27858-4353, USA;2. Cooperative Institute for Marine and Atmospheric Studies, Rosenstiel School of Marine and Atmospheric Science, University of Miami, Miami, FL 33149, USA;3. Atlantic Oceanographic & Meteorological Laboratory, 4301 Rickenbacker Causeway, Miami, FL 33149, USA
Abstract:We demonstrate an inherent conflict between ex ante efficient monitoring and liquidation decisions by outside claimholders. We show it can be useful to commit to inefficient liquidation when monitors fail to produce information: this provides stronger incentives to monitor. The implication for firm capital structure is that more information is generated about firm prospects – and hence firm value increases – when a firm’s cash flow is split into a ‘safe’ claim (debt) and a ‘risky’ claim (equity) compared to when a single claim is sold. We also derive the optimal allocation of control rights between safe and risky claims. This partially resolves the Tirole (2001) puzzle as to why firms issue multiple securities that generate ex post conflicts of interest.
Keywords:Debt  Equity  Soft budget constraint  Monitoring
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