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Dynamic investment and capital structure under manager-shareholder conflict

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  • Shibata, Takashi
  • Nishihara, Michi
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    Abstract

    This paper investigates the interactions between the investment and financing decisions of a firm under manager-shareholder conflicts arising from asymmetric information. In particular, we extend the manager-shareholder conflict problem in a real options model by incorporating debt financing. We show that manager-shareholder conflicts over investment policy increase not only the investment and default triggers but also coupon payments, which lead to a decrease in the equity value. Moreover, given the presence of manager-shareholder conflicts, debt financing increases investment and decreases total social welfare. As a result, there is a trade-off between the efficiency of investment and total social welfare with debt financing. These results fit well with the findings of previous empirical work in this area.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

    Volume (Year): 34 (2010)
    Issue (Month): 2 (February)
    Pages: 158-178

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    Handle: RePEc:eee:dyncon:v:34:y:2010:i:2:p:158-178

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    Web page: http://www.elsevier.com/locate/jedc

    Related research

    Keywords: Real options Debt financing Agency problem Asymmetric information;

    References

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    Citations

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    Cited by:
    1. Shibata, Takashi & Nishihara, Michi, 2012. "Investment timing under debt issuance constraint," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 981-991.
    2. Nishihara, Michi & Shibata, Takashi, 2011. "The effects of costly exploration on optimal investment timing," Review of Financial Economics, Elsevier, vol. 20(3), pages 105-112, August.
    3. Nishihara, Michi & Shibata, Takashi, 2013. "The effects of external financing costs on investment timing and sizing decisions," Journal of Banking & Finance, Elsevier, vol. 37(4), pages 1160-1175.
    4. Djembissi, Bertrand, 2011. "Excessive risk taking and the maturity structure of debt," Journal of Economic Dynamics and Control, Elsevier, vol. 35(10), pages 1800-1816, October.
    5. Shibata, Takashi & Tian, Yuan, 2012. "Debt reorganization strategies with complete verification under information asymmetry," International Review of Economics & Finance, Elsevier, vol. 22(1), pages 141-160.

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