We examine optimal leverage for a downstream firm relying on implicit (self-enforcing) contracts with a supplier. Performing a leveraged recapitalization prior to bargaining increases the firm's share of total surplus. However, the resulting debt overhang limits the range of credible bonuses,...

We develop a dynamic model of corporate investment and financing decisions in which corporate insiders have superior information about the firm's growth prospects. We show that firms with positive private information can credibly signal their type to outside investors using the timing of...