![The disciplinary role of debt and equity contracts: Theory and tests [An article from: Journal of Financial Intermediation]](http://ecx.images-amazon.com/images/I/51Z04HXRP1L.jpg)
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This digital document is a journal article from Journal of Financial Intermediation, published by Elsevier in 2006. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.
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We study how equity and debt contracts commit investors to discipline managers. Our model shows that the optimal allocation of debt, equity, and control rights depends on which disciplinary action is more efficient. When the efficient action is managerial replacement, then control rights should be allocated to equity holders, and capital structure should consist of equity and long-term debt. When the efficient action is liquidation, then control rights can be allocated to the manager, and capital structure should consist of equity and short-term debt. We find empirical support to the model’s predictions in a sample of leveraged buyout transactions.
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