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Investment Decisions, Debt Renegotiation Friction, and Agency Conflicts

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  • Hwa‐Sung Kim

Abstract

This paper investigates how investment decisions are influenced by the possibility of debt renegotiation failure and shareholder–debtholder conflicts by extending the Sundaresan and Wang (2007) model. We find that the difference in investment thresholds due to agency conflicts decreases as shareholders’ bargaining power increases. We also show that as the probability of renegotiation friction is lower, the investment threshold is lower, which is consistent with the empirical result of Favara et al. (2017).

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  • Hwa‐Sung Kim, 2020. "Investment Decisions, Debt Renegotiation Friction, and Agency Conflicts," International Review of Finance, International Review of Finance Ltd., vol. 20(2), pages 493-504, June.
    • Handle: RePEc:bla:irvfin:v:20:y:2020:i:2:p:493-504
    DOI: 10.1111/irfi.12208
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    References listed on IDEAS

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    1. Giovanni Favara & Enrique Schroth & Philip Valta, 2012. "Strategic Default and Equity Risk Across Countries," Journal of Finance, American Finance Association, vol. 67(6), pages 2051-2095, December.
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    5. Favara, Giovanni & Morellec, Erwan & Schroth, Enrique & Valta, Philip, 2017. "Debt enforcement, investment, and risk taking across countries," Journal of Financial Economics, Elsevier, vol. 123(1), pages 22-41.
    6. Shibata, Takashi & Nishihara, Michi, 2015. "Investment-based financing constraints and debt renegotiation," Journal of Banking & Finance, Elsevier, vol. 51(C), pages 79-92.
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    Cited by:

    1. Kim, Hwa-Sung, 2023. "Forced conversion to Chapter 7 bankruptcy and optimal financial decisions," Finance Research Letters, Elsevier, vol. 54(C).

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