This line of research studies corporate capital structure, investment and payout within a managerial agency framework. Managers maximise the present value of the rents they extract from the firm subject to a threat of collective action by outside equity holders. Collective action is costly, creating space for managers to extract rents, but the governance constraint forces rents and payout to shareholders to move in lockstep. Managers share in the firm’s earnings, but outside investors’ property rights prevent managers from sharing in the proceeds from disinvestment or firm closure. This creates incentives for managers to disinvest inefficiently late.
We show that raiders or hostile acquirers can enforce efficient disinvestment or closure because they have a zero (or low) cost of collective action. Debt can also mitigate or even eliminate excessive continuation by managers because debt speeds up disinvestment. The optimal capital structure trades off expected bankruptcy costs against managerial agency costs. Firms with weaker investor protection have more debt. Managers voluntarily adopt the optimal capital structure because they capture the firm value added by a debt issue.