This article illustrates an incentive-aligning role of debt in the presence of optimal compensation contracts. Owing to information asymmetry, value-maximizing compensation contracts allow managerial rents following high investment outcomes. The manager has an incentive to increase these rents...

This paper examines simultaneous incentive conflicts between shareholders, bondholders, and managers. Manager-owner conflicts arise from information asymmetries, and interact with traditional shareholder-bondholder conflicts (i.e., underinvestment and asset substitution conflicts). Managers are...

Recent research illustrates how cash flow commitments can mitigate both adverse selection and moral hazard problems. Debt commitments typically dominate dividend commitments due to stronger penalties and or tax advantages. This paper illustrates a previously unrecognized benefit of dividends...

Following John Graham's (2022) presidential address we develop a simple financing decision-rule under which leverage is not a priority unless it hits `dangerous' levels, and show how this rule helps reduce the gap between research and reality. The rule leads to debt financing that is distinct...