Template-Type: ReDIF-Paper 1.0 Author-Name:Hong Liu Author-X-Name-First:Hong Author-X-Name-Last: Liu Author-Email: Author-Workplace-Name: Olin School of Business,Washington University in Saint Louis Author-Name:Jianjun Miao Author-X-Name-First: Jianjun Author-X-Name-Last: Miao Author-Email: miaoj@bu.edu Author-Workplace-Name: Boston University, Department of Economics Title: Managerial Preferences, Corporate Governance, and Financial Structure Abstract:Conflicts of interest between insiders (e.g, controlling shareholders) and outsiders (e.g., minority shareholders) are central to the analysis of modern corporation. In an integrated continuous-time contingent claims framework with imperfect corporate governance, we examine a controlling shareholder’s optimal choice of capital structure, ownership concentration, private benefit diversion, consumption, and financial market investment. We derive solutions in explicit parametric forms up to numerical integrations. In addition to generating implications consistent with existing empirical evidence, we also show that managerial preference characteristics (such as risk aversion and impatience), corporate governance, and financial market are important determinants of equity value, credit spread, agency costs, capital structure, and ownership concentration. Our model produces many novel empirically testable predictions. For example, it implies that a more risk averse or a less impatient entrepreneur issues less debt and more equity, and that stronger corporate governance leads to higher equity value, lower leverage, less ownership concentration, and lower credit spread. In addition, it also suggests that as the Sharpe ratio in the financial market increases, firm leverage ratio, agency costs, and credit spread all increase. Length: 46 pages Creation-Date: 2006-03 Revision-Date: Publication-Status: File-URL: http://people.bu.edu/miaoj/optdebt19.pdf File-Format: Application/pdf File-Function: Number: WP2006-020 Classification-JEL:D11, D91, G11, C61 Keywords: Managerial/entrepreneurial characteristics, ownership and capital structure, private benefits of control, corporate governance Handle: RePEc:bos:wpaper:WP2006-020