Investment timing, liquidity, and agency costs of debt
This paper examines the effect of debt and liquidity on corporate investment in a continuous-time framework. We show that stockholder-bondholder agency conflicts cause investment thresholds to be U-shaped in leverage and decreasing in liquidity. In the absence of tax effects, we derive the optimal level of liquid funds that eliminates agency costs by implementing the first-best investment policy for a given capital structure. In a second step we generalize the framework by introducing a tax advantage of debt, and we show that an interior solution for liquidity and capital structure optimally trades off tax benefits and agency costs of debt.
Year of publication: |
2010
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Authors: | Hirth, Stefan ; Uhrig-Homburg, Marliese |
Published in: |
Journal of Corporate Finance. - Elsevier, ISSN 0929-1199. - Vol. 16.2010, 2, p. 243-258
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Publisher: |
Elsevier |
Keywords: | Investment timing Liquidity Agency costs of debt Capital structure Real options |
Saved in:
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