We found a match
Your institution may have access to this item. Find your institution then sign in to continue.
- Title
The Role of Debt and Preferred Stock as a Solution to Adverse Investment Incentives.
- Authors
Heinkel, Robert; Zechner, Josef
- Abstract
We analyze the optimal mix of debt, common equity, and preferred equity in a model with an investment opportunity and asymmetric information about its quality, and show that an all-equity financed firm will overinvest. Issuing the appropriate amount of debt before the project becomes available resolves this overinvestment problem. Introducing a second motive for debt, such as taxes, leads to a role for preferred stock as a means of enhancing the firm's "debt capacity," by creating additional incentives to invest. We derive an optimal capital structure involving debt, preferred stock, and common stock.
- Subjects
CORPORATE debt; CAPITAL structure; CAPITAL stock; INVESTMENTS; LOANS; PREFERRED stocks
- Publication
Journal of Financial & Quantitative Analysis, 1990, Vol 25, Issue 1, p1
- ISSN
0022-1090
- Publication type
Article
- DOI
10.2307/2330885