The growth optimal capital structure: manager versus shareholder objectives

The growth optimal capital structure: manager versus shareholder objectives

0.00 Avg rating0 Votes
Article ID: iaor201522780
Volume: 7
Issue: 3
Start Page Number: 259
End Page Number: 267
Publication Date: Sep 1984
Journal: Journal of Financial Research
Authors: ,
Keywords: management, statistics: distributions
Abstract:

Utilizing a geometric mean wealth maximization approach, this paper shows potential differences between the capital structure preferred by stockholders and the one preferred by managers. In general, managers may prefer more conservative, equity‐oriented financing, while stockholders desire greater financial leverage. The problem arises because of differences in the degree of portfolio diversification achieved by managers and stockholders. Stockholders tend to have reasonably well‐diversified portfolios, causing them to be concerned with systematic risk. Managers' portfolios are apt to be more concentrated and directly tied to the financial success of an employer, causing managers to be concerned with total risk. Thus, for a given capital structure, each party views the firm as having a different level of risk. Several executive compensation plans are considered that might more closely align the interests of managers and stockholders.

Reviews

Required fields are marked *. Your email address will not be published.