Abstract
Abstract I study leverage dynamics when the manager has discretion over the firm's debt policy but cannot commit to it ex-ante. Private benefits of control reduce the manager's incentives to ratchet up leverage and may induce active debt repurchase over time. Therefore, agency frictions prevent excessive leveraging and increase the funding advantage of debt. Firms with weak governance and low managerial ownership favor long-term debt, have high debt capacity, maintain low target leverage, and adjust the debt level faster towards the target. Finally, firms with high agency costs remain persistently unlevered in equilibrium. This result offers a potential resolution for the zero leverage puzzle.
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