UC Berkeley

This dissertation consists of two essays that look at the outcome of agency costs of debt on the firm's capital structure and governance decisions. The first essay considers how monitoring of management by a shareholder aligned board of directors may induce an asymmetric information problem between shareholders and creditors. To mitigate this problem, the board may be more lenient with the manager and may have an incentive to be inherently weaker. In the second essay, I consider how creditors and shareholders interact when both actively monitor the manager. I demonstrate that, ex-post to floating debt, active shareholders may unilaterally shirk their monitoring duties to shift the burden of costly monitoring to debt claimants.