Abstract
<jats:p>This paper extends the Leland trade-off model by introducing shareholder creditor bargaining over the perpetual debt coupon. A single parameter ϕ ∈ (0, 1) measures shareholder bargaining power and indexes the deviation of the negotiated coupon from the firm-value-maximising level. The main result is sharp: at the parity configuration ϕ = 1/2, the bargaining solution exactly recovers the Leland firm-value optimum, irrespective of every other parameter of the model. Deviations from parity generate a structural wedge whose direction is signed by ϕ − 1/2. When shareholders dominate (ϕ > 1/2), the negotiated coupon undershoots the value-maximising level and increases in shareholder power push leverage down while pushing earnings yield up, generating the negative leverage–profitability slope documented since Titman & Wessels (1988). When creditors dominate (ϕ < 1/2), the coupon overshoots and the slope reverses sign. The result maps cleanly into accounting data: under fair-value-oriented (IFRS) measurement the leverage–ROA slope inherits the sign pattern in closed form, while under historical-cost (GAAP) measure ment the cross-sectional slope along the bargaining axis is mechanically zero. The model delivers three testable predictions tied to measurable institutional characteristics: shareholder bargaining power, accounting regime, and insolvency efficiency.</jats:p>