Overcoming Agency Conflicts and Realizing First-Best Corporate Financial Policies

We develop a dynamic tradeoff model that incorporates both controlling-minority shareholders conflict and shareholders-debtholders conflict to examine the relationship among agency conflicts, expansion investment, capital structure, and debt renegotiation. We show that balancing the two conflicts can eliminate agency conflicts in effect and simultaneously make the firm achieve the first-best expansion decision. Endowing the controlling shareholder with appropriate bargaining power in debt renegotiation can realize zero agency costs and make the firm's capital structure maximize the firm value