Excessive Continuation and Dynamic Agency Costs of Debt

Preprint
Publisher Website
Google Scholar
  • 1 January 2000
    • preprint
      • Published in RePEc
Abstract
This paper analyses the incentives of the equityholders of a leveraged company to shut it down in a continuous time, stochastic environment. Keeping the firm as an ongoing concern has an option value but equity and debt holders value it differently. Equityholders decisions exhibit excessive continuation and reduce firms value. Using a compound exchange option approach, we characterise the resulting agency costs of debt, derive the ¶price¶ of these costs and analyse their dynamics. We also show how agency costs can be reduced by the design of debt and the possibility of renegotiation. (This abstract was borrowed from another version of this item.)

This publication has 0 references indexed in Scilit: