Optimal ownership and capital structure with agency conflicts and debt renegotiation
Seminar in Insurance and Economics
SPEAKER: Zhaojun Yang (Southern University of Science and Technology).
TITLE: Optimal ownership and capital structure with agency conflicts and debt renegotiation.
ABSTRACT: We describe a continuous-time growth investment model that considers debt renegotiation to examine agency conflicts among controlling shareholders, minority shareholders, and creditors. We show that controlling shareholders' private control benefits accelerate investment while their skin-in-the-game and debt overhang delay it. Exploiting the opposite conflicts can realize the first-best investment. We reveal how entrenchment and alignment effects shape optimal ownership structure. Debt renegotiation has two opposite effects on investment: worsening debt overhang for low-risk projects and alleviating it for high-risk ones. We provide alternative interpretations for the pecking order theory and debt financing and present model implications for corporate security design.