【正文】 of the equity and mitigates the loss from the con?ict between the manager and shareholders. Moreover, as pointed out by Jensen (1986), since debt mits the ?rm to pay out cash, it reduces the amount of ?free? cash available to managers to engage in the types of pursuits mentioned above. This mitigation of the con?icts between managers and equityholders constitutes a bene?t of debt ?nancing. A number of implications follow from this analysis. First, one wouldexpect bond contracts to include features that attempt to prevent asset substitution, such as interest coverage requirements, prohibitions against investments in new unrelated lines of business, etc. Second, industries in which the opportunities for asset substitution are more limited will have higher debt levels ceteris paribus. Thus, for example, the theory predicts that regulated public utilities, banks, and ?rms in mature industries with few growth opportunities will be more highly leveraged. Third, it is optimal for ?rms with slow or even negative growth, and that have large free cash in ?ows from operations, to have more debt. Large free cash ?ows without good investment prospects create the resources to consume perquisites, build empires, overpay subordinates etc. Increasing debt reduces the amount of ?free cash? and increases the manager?s fractional ownership of the residual claim. According to Jensen (1986) industries with these characteristics include steel, chemicals, brewing, tobacco, television and radio broadcasting, and wood and paper products. The theory predicts that these industries should be characterized by high leverage ratios. . Corporate Control One limitation of agency theory is that it assumes the agency problem can be mitigated, or eliminated, by a prehensive contract which postulates all the future contingencies and states the circumstances in which the manager should take what action, as criticised by Hart (1995a, 1995b). But such a prehensive contract would be very costly to design and/or execute(Williamson, 1988). It may well be optimal to leave the contract inplete, and to assign the equityholders the residual control rights beyond contractual control rights which are assigned to the debtholders (Aghion and Bolton, 1992). This inplete contract approach regards equity and debt as contingent state? securities. When the ?rm is ?nancially healthy, it is the equityholders who have control. But a default of debt repayment will trigger the transfer of control to the debtholders. Liquidation of the ?rm and/or managerial sackings are then inevitable. Thus management is constrained by the requirement to ensure a smooth repayment of debt (see table I). Two related models share a mon concern with con?icts between shareholders and managers, though they differ in the speci?c ways in which the con?icts arise and in the role of debt. Harris and Raviv (1990) postulate that managers always want to continue the ?rm?s current operations, even if liquidation of the ?rm would be the preferred option for investors. But debt can force managers to liquidate ?rms, because default may well trigger the managers? job loss. The optimal capital structure is achieved by trading off improved liquidation decisions against higher investigation costs. A different model by Stulz (1990) is based on the assumption that managers always wa