The Interaction of Capital Structure and Ownership Structure

Abstract

This paper develops a model in which the interaction of the capital structure and the ownership structure of a managerrun firm can be analyzed. Multiple securities arise as optimal in the model. This allows for a meaningful analysis of interaction effects between various aspects of the capital and ownership structure, in particular interactions between features of debt and equity. Empirical implications are derived for the interaction of equity ownership dispersion, debt ownership structures, bank debt (subject to covets) and dispersed public debt, board representation of large investors, and features of the institutional environment (such as the bankruptcy law). There is also a predicted (positive) relationship between the need to induce managers to invest for the long term and the extent to which equity should be dispersed. In addition, the paper predicts that the ability of debt holders to control managerial selfinterest may be a complement to (and not a substitute for) the ability of equity holders to control managerial selfinterest. Finally, the paper demonstrates that the capital and ownership structures are useful for providing incentives for both managers and investors, even if monetary incentive schemes (salaries, bonuses, etc.) are optimally designed

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