Case study # 1

Title: Corporate Governance and Capital Structure Dynamics

BACKGROUND OF THE CASE

The system in which corporations are being directed and controlled is known as corporate
governance. Is structure distributes the rights and responsibilities of the different participants in the
corporation. On the other hand, capital structure is how a corporation finances its overall operation with
the use of various funds. Self-interested managers do not make capital structure decisions that maximize
shareholder wealth is an established view in the literature. Thus, capital structure of a firm is not only
dependent with market frictions, like taxes, bankruptcy costs, or refinancing costs, but also the degree of
manager-shareholder conflicts also influences.
STATEMENT OF THE PROBLEM
What is the importance of manager-shareholder’s conflicts in capital structure choice and their
effects on the dynamics and cross section of corporate capital structure?

SWOT ANALYSIS:

Strength
Transaction costs have too small effects on debt choices
One can obtain capital structure dynamics consistent with the data
Can provide additional support for the agency cost channel in explaining financing decisions

Weakness
Prone to managerial malpractice
Need more time to be mastered

Opportunities
Can determine the optimal leveraging decision of managers
Can characterize the effects of manager-shareholder conflicts on target leverage

Threats
Letting the conflicts overrule much longer can be advantageous

ALTERNATIVE ACTION

PROS:
 Taxes both corporate and personal, refinancing and liquidation costs and costly renegotiation of
debt in distress were featured
 The optimal leveraging decisions of the managers have been identified.
 Analysis showed how capital market friction affects in the dynamic leverage ratio.
CONS
 The models are static, making it difficult to develop tests of connection between agency conflicts
and capital structure dynamics.
 External and internal governance mechanisms greatly affect with respect to the value of control
and firms’ decisions.