Debt and private benefits appropriation by a controlling shareholder: Introducing a creditors’ holdup effect

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Debt is not frequently analyzed in relation to the conflicts between a controlling shareholder, outside investors and creditors. We follow Jensen and Meckling’s (1976) intuition that debt can be a tool to transfer value to creditors, at the same time it acts to discipline private benefits appropriation. An option valuation model is used to show that debt is also a key governance variable, because it can moderate or enhance private benefits and because at the same time incentivization will trigger a transfer of value to the creditors. We show that debt is a complex regulation tool in an agency contract approach, as it is simultaneously an expropriation device and a limitation tool. Debt is a disciplinary tool for shareholders, but, to avoid a holdup by creditors, we also need to discipline the disciplinary tool.

Author(s):

Hubert de la Bruslerie    
University Paris Dauphine
France