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Incentive Conflicts, Bundling Claims, and the Interaction among Financial Claimants

Chester S. Spatt and Frederic P. Sterbenz
The Journal of Finance
Vol. 48, No. 2 (Jun., 1993), pp. 513-528
Published by: Wiley for the American Finance Association
DOI: 10.2307/2328910
Stable URL: http://www.jstor.org/stable/2328910
Page Count: 16
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Incentive Conflicts, Bundling Claims, and the Interaction among Financial Claimants
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Abstract

We show that for certain capital structures equity has an incentive to buy out another claim and alter the firm's investment strategy so as to maximize the combined value of equity and the acquired claim. This restructuring may reintroduce agency problems into capital structures which appear to avoid agency conflicts. By boundling claims, it is possible to avoid this agency problem. The agency problem is also eliminated by dispersed ownership of the claims.

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