Managerial Entrenchment and the Choice of Debt Financing

IMF Working Papers, July 1, 1999

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Managerial Entrenchment and the Choice of Debt Financing

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Bibliographic details

• Authors: Amadou N Sy
• Published: July 1, 1999
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451851700.001

Overview and research question

• Author: Amadou N Sy
• Publication date: July 1, 1999
• Series: Working Paper No. 1999/094
• Issue: 094
• Volume: 1999
• Pages: 29
• DOI: https://doi.org/10.5089/9781451851700.001
• ISBN: 9781451851700
• ISSN: 1018-5941
• Subject: Credit risk, Debt financing, Debt renegotiation, Private debt, Public debt
• Keywords: capital structure, marginal revenue, short-term debt, WP

Core model and mechanisms

• The paper analyzes the choice between public and private debt by an entrenched manager.
• The model compares managerial incentives and firm outcomes under public bond issuance, private debt (including bank lending), and renegotiation possibilities.
• Key mechanism: manager’s tradeoff between value gains from contractual flexibility and private gains from reduced monitoring or renegotiation of restrictions.

Main findings

• When the firm’s credit risk is low:
  • Management issues public bonds because of the value gains from increased flexibility rather than reduced restrictions and monitoring.
  • Management’s expected private gains decrease as initial private debt restrictions are selectively relaxed.
• When the firm’s credit risk is high:
  • Management issues private debt because of the value gains and private benefits from renegotiating more stringent restrictions.
• When the maturity of private debt is shortened:
  • Privately and publicly placed bonds can be preferred to bank debt.

Implications for debt structure and renegotiation

• Low credit risk environment:
  • Public bonds are preferred due to managerial valuation of flexibility.
  • Relaxation of private-debt restrictions can reduce managers’ private benefits, altering incentives.
• High credit risk environment:
  • Private debt instruments (including bank debt) are preferred due to renegotiation benefits and tighter restrictions that managers can extract value from.
• Shortening private-debt maturities:
  • Alters comparative advantage of bank debt versus publicly or privately placed bonds; shorter maturities can make bonds more attractive relative to bank lending.

Publication context

• Type: IMF Working Papers
• Note: "This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate."

Source: IMF Working Paper "Managerial Entrenchment and the Choice of Debt Financing" by Amadou N Sy, July 1, 1999.

Content in this bundle

• Managerial Entrenchment and the Choice of debt financing - WP/99/94
  • Managerial Entrenchment and the Choice of debt financing - WP/99/94 (Markdown version)
  • Managerial Entrenchment and the Choice of debt financing - WP/99/94 (PDF)