Best Paper - Volume 15

The JFI editors are pleased to announce that the JFI Stuart Greenbaum Prize for the most significant paper published in the 2006 Journal of Financial Intermediation has gone to Yaniv Grinstein for the paper "The Disciplinary Role of Debt and Equity Contracts: Theory and Tests," published in Volume 15, Issue 4. The prize carries with it a $2,500 check for the winners.

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The Disciplinary Role of Debt and Equity Contracts: Theory and Tests
Yaniv Grinstein
Johnson Graduate School of Management, Cornell University, Ithaca, NY 14853, USA

Abstract

We study how equity and debt contracts commit investors to discipline managers. Our model shows that the optimal allocation of debt, equity, and control rights depends on which disciplinary action is more efficient. When the efficient action is managerial replacement, then control rights should be allocated to equity holders, and capital structure should consist of equity and long-term debt. When the efficient action is liquidation, then control rights can be allocated to the manager, and capital structure should consist of equity and short-term debt. We find empirical support to the model's predictions in a sample of leveraged buyout transactions. JEL Classification Numbers: G32; G33; G34. ©2006 Elsevier Inc.