Capital and Ownership Structures, and the Market for Corporate Control

I analyze optimal capital and ownership structures as resulting from anticipated future control contests. I focus on leverage as a device that enables the incumbent management to extract the maximum value from the rival. I show that firm value depends on both capital and ownership structures. The analysis leads to the following predictions: (i) more efficient managers use less debt, (ii) firms facing better rivals for control issue more debt, and (iii) firms with supermajority rules issue less debt. Several predictions are consistent with known empirical regularities.