| Abstract : | This paper studies a complete information game of capital structure played by the manager of the firm, the shareholders and the debtholders and characterized by two sources of moral hazard: (i) the problem of effort exercise and (ii) excessive risk taking. The equilibrium concept which is followed is that of the Subgame Perfect Nash Equilibrium. Due to the assumptions of perfect competition in the capital markets and risk neutrality, the SPNE that are derived are multiple. Therefore, refinement is done using the criterion of payoff dominance and the payoff dominant SPNE is declared as the “reasonable solution” of the game. An algorithm that straightforward produces the “reasonable solution” given the values of the parameters of the game is constructed. Moreover, suggestions for further research regarding the analysis of games of capital structure that combine moral hazard with asymmetric information are made. The types of management in such games are distinguished and the equilibriumconcept that is proposed is that of the Perfect Bayesian Equilibrium. A sketch of the methodology that derives the PBE of some of these games is also included.
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