Conflict Between Control Opportunism and Motivation

Large companies provide funds for their activities through a combination of secured debt, unsecured debt, and equity and the investors who provide these three forms of capital can obtain different degrees of return under different risk levels. Therefore, modern investors can be regarded as groups of people with different priorities for company assets.

When the company goes bankrupt, the management layer pays back the investors through two methods. The first is the substantial control of the structural reorganization. The second is that the management layer controls the timing of its debt restructuring decision by modifying the debt contract and restructuring the capital structure. In exercising this discretionary power, the management could be tempted by the opportunism of control: the company’s decision may benefit only a part of the shareholders and the management at the same time economically or in other aspects. What is important is that opportunism could have a significant impact in reality. Investors’ concern that managers may favor certain creditors will reduce their motivation for initial investment.