Title: Optimal ownership and capital structure with agency conflicts and debt renegotiation
Abstract: We develop a continuous-time growth investment model with debt renegotiation to examine agency conflicts among controlling shareholders, minority shareholders, and creditors. We show that controlling shareholders' private control benefits accelerate investment while their skin-in-the-game and debt overhang delay it. Exploiting the two opposite conflicts can realize the first-best investment. Increasing debt or controlling shareholders' equity alleviates agency conflicts. We reveal how entrenchment and alignment effects shape optimal ownership structure and capital structure. Debt renegotiation has two opposite effects on investment: exacerbating debt overhang for low-risk projects and alleviating it for high-risk ones. We present model implications for corporate security design.
