One enhancement from a merger can be improved managerial incentives from an increase in debt. How can
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One enhancement from a merger can be improved managerial incentives from an increase in debt. How can a large debt-load improve managerial incentives?
Substituting debt for equity reduces the number of shareholders outstanding, which relieves managers of pleasing many shareholders.
Interest reduces net income, which means management will have to increase sales to continue to receive performance bonuses.
Debtholders are more likely to serve as police rather than partners, which will force management to maximize profits.
It increases the risk of bankruptcy, which encourages managers to maximize free cash flow.
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