Essays on dividend policy and debt restructuring

My dissertation consists of research on two issues: dividend policy and debt restructuring.;The first chapter analyzes an infinite-horizon model of a firm that operates in an environment of asymmetric information between firm managers and outside capital markets, and where managers optimally select the intertemporal dividend policy. The costly payment of dividends serves as a signal of current firm value because managers of valuable firms care relatively more about how much of the firm is sold to the new shareholders than about the tax cost of the dividends. We show the model is consistent with some of the salient intertemporal stylized facts, for example, dividends appear to exhibit dividend smoothing to a researcher using the methods of Lintner (1956) or Fama & Babiak (1968). In addition, the model rationalizes the observation that high growth firms tend to pay relatively low dividends.;The second chapter develops a model in which dividend and investment policies are determined by a manager who maximizes the rents captured from controlling the firm. Cash shortfalls present a risk to the manager because when they occur the manager loses the opportunity to consume the benefits produced by previous investment. The model is constructed around a trade off between the near-term and the far-term risks that the firm will be unable to meet its fixed obligations, due to shortages of cash. We show that there exists a unique robust separating equilibrium.;The final chapter is joint work with Richard Green. This chapter develops a model of debt renegotiation and uses it to study the firm's optimal mixture of private and public debt financing. The need to renegotiate is occasioned by the debt-overhang problem, and renegotiating is costly due to the presence of small creditors who hold out and free ride on the benefits of the restructuring. Optimal repurchases are shown to take on a very simple form. When the capital structure is adopted at a time when the firm has private information about the prospect for future distress, we show that the ownership structure of the debt may signal firm quality, and robust equilibria necessarily involve the use of public debt.