Measuring investment distortions arising from stockholder-bondholder conflicts

We examine the importance of stockholder-bondholder conflicts in capital-st ructure choice. Numerical techniques are used to compute the expected wealt h transfer between stockholders and bondholders when a firm adopts a new pr oject. We characterize the set of positive NPV projects that stockholders p refer to ignore and the set of negative NPV projects that stockholders want to accept. The results illustrate how these distortions vary with firm and project characteristics. We also estimate the impact of stockholder-bondho lder conflicts on investment decisions for 23 different firms and examine t he extent to which stockholder-bondholder conflicts explain observed cross- sectional variation in capital structures. (C) 1999 Elsevier Science S.A. A ll rights reserved.