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


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)


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