Abstract
We develop an incomplete contracts model to study the extent to which control rights of different financings affect corporate growth. The model admits a standard hold-up problem under equity financing; insiders may be disincentivized to do RD both managers and shareholders may divert corporate resources to themselves before debt is serviced. However, in many cases, these phenomena do not occur in equilibrium and control rights are irrelevant. Cross-sectional predictions are derived from those cases where control rights matter. Consistent with the empirical evidence, leverage is inversely related to growth and to profitability.
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