The restriction of debt financing on managers is mainly manifested in the following four aspects.
(1) Corporate debt financing will reduce the company's investment ability, control its unlimited investment impulse and protect the interests of investors. When the company has more operating surplus, shareholders generally want to return the surplus funds in the form of dividends, and managers generally want to invest. Even if there are few investment opportunities, managers want to expand through mergers and acquisitions and increase their control. However, from the perspective of shareholders, this kind of expenditure is inefficient. In this case,
(2) Debt constraint aggravates the possibility of bankruptcy. In some cases, the bankruptcy of a company may be beneficial to the interests of investors. However, operators generally do not want the company to go bankrupt. In this case, if there is a hard debt constraint, creditors can go bankrupt and liquidate the company according to the bankruptcy law.
(3) The role of debt financing in limiting the company's invalid investment is related to the company's industry characteristics. Generally speaking, the liabilities of companies in emerging industries are lower than those in mature industries. There are few investment opportunities in mature industries, and these companies have accumulated a lot of surplus funds in the long-term operation. Debt has a weak restrictive effect on the company's ineffective investment. For companies in emerging industries, their value mainly lies in future growth opportunities, and there may not be enough current income to repay interest in the near future, which plays a role in limiting the company's invalid investment.
(4) Creditors can easily observe the company's past repayment records. The better the repayment record of the company, the lower the cost for the company to obtain further loans. This encourages the company to operate well and maintain a good repayment record.
In short, debt is not a waste to oneself, but forces managers to distribute the cash income of enterprises to investors immediately. Debt is not their own waste, but it forces managers to sell bad assets and limits the ineffectiveness of managers. However, if the debtor is unable to repay the debt or the enterprise needs to repay the debt, the creditor will investigate the financial situation of the enterprise according to the debt contract.