Debt Dynamic, Debt Dispersion and Corporate Governance

Why do some firms borrow from multiple creditors and employ multiple debt types? This paper shows that entrenched managers exploit coordination failure and free-riding problem amongst multiple creditors. [1] We find that managerial entrenchment is inversely related to debt specialization and creditors concentration. [2] We find that firms under entrenched management have a higher proclivity to employ multiple debt types and have a dispersed debt structure. Firms that are well-managed have a tendency to concentrate debt and borrow predominantly from a few creditors. [3] We also show that while bank debt is negatively related to debt specialization, market debt is positively related to debt specialization. Overall, our findings suggest that creditors can discipline managers through debt specialization