English, Article, Journal or magazine article edition: A Theory of Corporate Financial Structure Based on the Seniority of Claims Oliver Hart; John Moore

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Bookmark: http://trove.nla.gov.au/version/140883
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • A Theory of Corporate Financial Structure Based on the Seniority of Claims
Author
  • Oliver Hart
  • John Moore
Physical Description
  • preprint
Notes
  • We develop a theory of optinal capital structure based on the idea that debt ath equity differ in their priority status relative to future corporate cash pants. A company with high (dispersed) debt will find it hard to raise new capital since new security-holders will have lew priority relative to existing senior creditors. Conversely for a company with lew debt. We show that there is an optimal debt-equity ratio and mix of senior and junior debt for a corporation whose management may undertake unprofitable as well as profitable investments. Among other things, our theory can explain the obserrvation that profitable firms have low debt. In addition, it predicts that (long-term) debt will be high if new investment is risky ard on average profitable, or if assets in place are risky an new investment is on average unprofitable.
  • RePEc:nbr:nberwo:3431
Language
  • English
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