Debt A Disciplining Force for Managers or a Debilitating Force for Organizations

Some scholars have argued that the use of leverage can improve the efficiency and effectiveness of firms by disciplining managers. In fact, many U.S. corporations significantly increased their use of leverage during the 1980s. However, a number of these highly leveraged corporations have encountered severe performance problems in recent times. The reductions in performance are often attributed to extraordinary debt and, consequently, the value of debt as a disciplining force in the modern corporation is being questioned. Herein, the authors explore inconsistencies in the logic underlying popularly held views regarding the use of debt as a managerial disciplining force. They also highlight investment tradeoffs associated with high debt. Although they do not advocate the elimination of debt, they argue that it must be effectively balanced with other governance mechanisms to ensure maximum firm performance.

[1]  R. Thaler,et al.  Does the Stock Market Overreact , 1985 .

[2]  Charles R. Schwenk.  The Essence of Strategic Decision Making , 1988 .

[3]  E. Altman.  Corporate Financial Distress and Bankruptcy: A Complete Guide to Predicting & Avoiding Distress and Profiting from Bankruptcy , 1993 .

[4]  Abbie J. Smith.  Corporate ownership structure and performance *1: The case of management buyouts , 1990 .

[5]  R. Thaler,et al.  Further Evidence On Investor Overreaction and Stock Market Seasonality , 1987 .

[6]  M. Hitt,et al.  Are acquisitions a poison pill for innovation , 1991 .

[7]  D. Ravenscraft,et al.  LBOs, debt and R&D intensity , 1993 .

[8]  Michael A. Hitt,et al.  Managerial Risk Taking in Diversified Firms: An Evolutionary Perspective , 1991 .

[9]  Shorey Peterson,et al.  The Modern Corporation and Private Property. , 1933 .

[10]  J. Sheppard.  When the Going Gets Tough, the Tough Go Bankrupt , 1992 .

[11]  Ken G. Smith,et al.  Organizational Information Processing, Competitive Responses, and Performance in the U.S. Domestic Airline Industry , 1991 .

[12]  Robert E. Hoskisson,et al.  Effects Of Acquisitions on R&D Inputs and Outputs , 1991 .

[13]  M. Hitt,et al.  A CROSS-CULTURAL EXAMINATION OF STRATEGIC DECISION MODELS: COMPARISON OF KOREAN AND U.S. EXECUTIVES. , 1990 .

[14]  M. C. Jensen,et al.  Harvard Business School; SSRN; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Harvard University - Accounting & Control Unit , 1976 .

[15]  M. C. Jensen,et al.  Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers , 1999 .

[16]  Merton H. Miller.  The Cost of Capital, Corporation Finance and the Theory of Investment , 1958 .

[17]  M. Weidenbaum.  Public Policy Toward Corporate Takeovers , 1986 .

[18]  A Rappaport,et al.  The staying power of the public corporation. , 1990, Harvard business review.

[19]  Y. Amihud,et al.  Risk Reduction as a Managerial Motive for Conglomerate Mergers , 1981 .

[20]  J. Barney.  Types of Competition and the Theory of Strategy: Toward an Integrative Framework , 1986 .

[21]  Ian C. MacMillan,et al.  Strategy formulation : political concepts , 1978 .

[22]  Teresa A. John.  Corporate restructuring and incentive effects of leverage and taxes , 1991 .

[23]  Howard Thomas,et al.  BANKRUPTCY AS A DELIBERATE STRATEGY: THEORETICAL CONSIDERATIONS AND EMPIRICAL EVIDENCE , 1993 .

[24]  Stephen F. LeRoy,et al.  The Present-Value Relation: Tests Based on Implied Variance Bounds , 1981 .

[25]  John Joseph McCall,et al.  The Economics of Information and Uncertainty , 1982 .

[26]  Robert E. Hoskisson,et al.  The Composition of Boards of Directors and Strategic Control: Effects on Corporate Strategy , 1990 .

[27]  D. Hambrick,et al.  Upper Echelons: The Organization as a Reflection of Its Top Managers , 1984 .

[28]  Michael A. Hitt,et al.  Downscoping: How to Tame the Diversified Firm , 1994 .

[29]  Beverly B. Tyler,et al.  Strategic decision models: Integrating different perspectives , 1991 .

[30]  Steven N. Kaplan,et al.  Management Buyouts: Evidence on Taxes as a Source of Value , 1989 .