Date Added: May 2010
This paper shows that stakeholders' multilateral opportunistic behavior during financial distress may lead to premature liquidation of the firm. Consequently, the firm will use its capital structure to mitigate the costs of such opportunism. Specifically, the firm will reduce its debt so that the probability of multilateral opportunism is zero; namely, it will use only safe debt. The paper predicts that the debt-equity ratio will decrease with risk, the number of contracts, the difficulty in writing them and in achieving franchising arrangements, the supplier's importance in opportunistic coalitions and a decrease in the firm's size, or the supplier's adjustment costs.