Too Able to Commit: Contract Renegotiation and Efficient Takeover

When bankruptcy costs are introduced to Zwiebel's 1996 model of dynamic capital structure, only lower-ability managers can use debt as a commitment to refrain from empire-building. Anticipated debt contract renegotiation between a higher-type manager and the creditor reduces the expected value of the firm. The shareholder will choose to intervene through takeover and replace the manager.