Managerial Autonomy, Allocation of Control Rights and Optimal Capital Structure

We examine the design of control rights of external financiers and how these interact with the firm's security issuance and capital structure when the firm's initial owners and manager may disagree with new investors over project choice. The first main result is an ex ante managerial preference for “soft” financial claims that maximize managerial project-choice autonomy, in contrast to agency theory. Second, a dynamic “pecking order” of cash, equity and debt emerges. Additional results explain equity issuance at high prices, why leverage ratios drift with stock returns, cash hoarding and debt usage without taxes, agency or signaling