If ownership and control are separated, leaving the manager with discretion may be of value. This paper discusses the extent to which a firm's ownership structure may serve as a commitment for shareholders not to interfere with the manager's project decisions, thereby reducing the agency cost of debt. As shareholder passivity means granting the manager more freedom, the costs of this commitment are increased managerial on-the-job consumption and shirking. Trading off the costs and benefits of managerial discretion, we derive a unique optimal ownership concentration. The paper also establishes a link between firm growth and ownership structure, implying that firms with concentrated ownership may forego profitable investment opportunities even if there is no credit rationing. Moreover, the paper discusses the extent to which agency problems between shareholders and debtholders can be alleviated by delegating control to debtholders.
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