SHORT-TERM VERSUS LONG-TERM INTERESTS - CAPITAL STRUCTURE WITH MULTIPLE INVESTORS

We study the problem of financial contracting and renegotiation betwee n a firm and outside investors when the firm cannot commit to future p ayouts, but assets can be contracted upon. We show that a capital stru cture with multiple investors specializing in short-term and long-term claims is superior to a structure with only one type of claim, becaus e this hardens the incentives for the entrepreneur to renegotiate the contract ex post. Depending on the parameters, the optimal capital str ucture also differentiates between state-independent and state-depende nt long-term claims, which can be interpreted as long-term debt and eq uity.