Tobin's "Q", Debt Overhang, and Investment
Incorporating debt in a dynamic real options framework, we show that underinvestment stems from truncation of equity's horizon at default. Debt overhang distorts both the level and composition of investment, with underinvestment being more severe for long-lived assets. An empirical proxy for the shadow price of capital to equity is derived. Use of this proxy yields a structural test for debt overhang and its mitigation through issuance of additional secured debt. Using measurement error-consistent GMM estimators, we find a statistically significant debt overhang effect regardless of firms' ability to issue additional secured debt. Copyright 2004 by The American Finance Association.
Year of publication: |
2004
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Authors: | Hennessy, Christopher A. |
Published in: |
Journal of Finance. - American Finance Association - AFA, ISSN 1540-6261. - Vol. 59.2004, 4, p. 1717-1742
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Publisher: |
American Finance Association - AFA |
Saved in:
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