Interactions of corporate financing and investment decisions: The effects of agency conflicts

Paul D. Childs, David C. Mauer, Steven H. Ott

Research output: Contribution to journalArticlepeer-review

150 Scopus citations

Abstract

We examine interactions between flexible financing and investment decisions in a model with stockholder-bondholder conflicts over investment policy. We find that financial flexibility encourages the choice of short-term debt thereby dramatically reducing the agency costs of under- and overinvestment. However, the reduction in agency costs may not encourage the firm to increase leverage, since the firm's initial debt level choice depends on the type of growth options in its investment opportunity set. The model has a number of testable predictions for the joint choice of leverage and maturity, and how these choices interact with a firm's growth opportunities.

Original languageEnglish
Pages (from-to)667-690
Number of pages24
JournalJournal of Financial Economics
Volume76
Issue number3
DOIs
StatePublished - Jun 2005

Keywords

  • Capital structure
  • Real options
  • Stockholder-bondholder conflicts

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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