Short-Term versus Long-Term Interests: Capital Structure with Multiple Investors.

Abstract

The authors study the problem of financial contracting and renegotiation between a firm and outside investors when the firm cannot commit to future payouts but assets can be contracted upon. The authors show that a capital structure with multiple investors specializing in short-term and long-term claims is superior to a structure with only one type of claim because this hardens the incentives for the entrepreneur to renegotiate the contract ex post. Depending on the parameters, the optimal capital structure also differentiates between state-independent and state-dependent long-term claims, which can be interpreted as long-term debt and equity. Copyright 1994, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.