DP4757 Capital Structure under Imperfect Enforcement
|Author(s):||Hans K Hvide, Tore Leite|
|Publication Date:||November 2004|
|Keyword(s):||cash diversion, costly state verification, financial contracts, outside equity|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=4757|
Building on a costly state verification framework, we propose a theory of capital structure with imperfect enforcement. In addition to being consistent with stylized facts on the choice of capital structure, it accommodates a range of empirical regularities on the repayment behaviour, such as strategic defaults of debt obligations, costly bankruptcy, investor intervention, and violations of absolute priority rules.