Short-Term Termination Without Deterring Long-Term Investment: A Theory of Debt and Buyouts

Abstract

The option to terminate a manager early minimizes investor losses if he is unskilled. However, it also deters a skilled manager from undertaking long-term projects that risk low earnings. This paper demonstrates how risky debt can overcome this tension. Leverage concentrates equityholders’stakes, creating incentives for them to learn the cause of low… (More)

Topics

2 Figures and Tables