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.