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Managerial Entrenchment and Debt Specialization

Why do some firms borrow from multiple creditors and employ multiple debt types? This paper shows that entrenched managers exploit the coordination failure and free riding problem amongst multiple creditors. We find that firms with entrenched management have a higher proclivity to employ multiple debt types and have a dispersed debt structure. On the other hand, firms that are well-managed have a tendency to concentrate debt and borrow predominantly from a few creditors. We also find that while bank debt is negatively related to debt specialization, market debt is positively related to debt specialization. Overall, the findings suggest that creditors can discipline managers through debt specialization.