DP4757 Capital Structure under Imperfect Enforcement

Author(s): Hans K Hvide , Tore Leite

Publication Date: November 2004

Keyword(s): cash diversion , costly state verification , outside equity , financial contracts

JEL(s):

Programme Areas: Financial Economics

Link to this Page: www.cepr.org/pubs/dps/DP4757.asp

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.