Incentive Conflicts, Bundling Claims, and the Interaction among Financial Claimants

Authors

  • CHESTER S. SPATT,

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    • Spatt is from the Graduate School of Industrial Administration, Carnegie Mellon University, and Sterbenz is from the Department of Economics and Finance, University of Wyoming. The authors thank Herb Johnson, Rick Green, René Stulz (the editor), an anonymous referee, and participants at presentations at the Western Finance Association meetings and the University of Illinois at Chicago for helpful comments. Financial support from the National Science Foundation is gratefully acknowledged.

  • FREDERIC P. STERBENZ


ABSTRACT

We show that for certain capital structures equity has an incentive to buy out another claim and alter the firm's investment strategy so as to maximize the combined value of equity and the acquired claim. This restructuring may reintroduce agency problems into capital structures which appear to avoid agency conflicts. By bundling claims, it is possible to avoid this agency problem. The agency problem is also eliminated by dispersed ownership of the claims.

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