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

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

doi:10.1016/j.jfineco.2004.06.012

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 journal › Article › peer-review

182 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 language	English
Pages (from-to)	667-690
Number of pages	24
Journal	Journal of Financial Economics
Volume	76
Issue number	3
DOIs	https://doi.org/10.1016/j.jfineco.2004.06.012
State	Published - 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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10.1016/j.jfineco.2004.06.012

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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.",

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AB - 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.

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

Abstract

Keywords

ASJC Scopus subject areas

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