Abstract
We examine in a Cournot duopoly model the well-known view that short-term capital market debt can control managerial moral hazard. We show that short-term debt does not provide this discipline because of management's manipulation of the information flow to the market. Shareholders may nevertheless prefer short-term debt because it motivates management to be more aggressive in the product market. We contrast short-term and long-term capital market financing with bank credit that includes monitoring. The empirical implications link managerial agency, predation, and the choice of debt maturity and funding source. Copyright 2001 by University of Chicago Press.
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