Capital Structure and Stockholder Incentives P.V.

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Capital Structure and Stockholder Incentives P.V. Viswanath Financial Theory and Strategic Decision-Making Outline Shareholder incentives to increase risk Incentives to focus on the short-run Incentives to underinvest Incentives to pay

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01
Capital Structure and Stockholder Incentives P.V. Viswanath Financial Theory
and
Strategic Decision-Making<br>
02
Outline Shareholder incentives to increase risk
Incentives to focus on the short-run
Incentives to underinvest
Incentives to pay excessive dividends
Impact on access to debt and equity capital
Impact on the liquidation decision – incentives to keep a firm intact when it should be liquidated.<br>
03
Leverage and Risk We first look at the incentives for levered firms to take excessive risk.
This also leads to a phenomenon called credit rationing, as well as managerial unwillingness to liquidate the firm.
We will look at three examples; in the first two, the firm will not need to invest additional resources.
In the first example, one of the options is to do nothing; in the second example, the firm has to choose between two alternate projects.<br>