Excessive continuation and dynamic agency costs of debt
AbstractThis 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. Equity holders' decisions exhibit excessive continuation and reduce the firm's value. Using a compound exchange option approach, we characterize the resulting agency costs of debt, derive the âpriceâ 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.
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Bibliographic InfoArticle provided by Elsevier in its journal European Economic Review.
Volume (Year): 46 (2002)
Issue (Month): 9 (October)
Contact details of provider:
Web page: http://www.elsevier.com/locate/eer
Other versions of this item:
- Décamps, Jean-Paul & Faure-Grimaud, Antoine, 2000. "Excessive Continuation and Dynamic Agency Costs of Debt," IDEI Working Papers 99, Institut d'Économie Industrielle (IDEI), Toulouse.
- Decamps, J.-P. & Faure-Grimaud, A., 2000. "Excessive Continuation and Dynamic Agency Costs of Debt," Papers 00-533, Toulouse - GREMAQ.
- Décamps, Jean Paul & Faure-Grimaud, Antoine, 2000. "Excessive continuation and Dynamic Agency Costs of Debt," CEPR Discussion Papers 2504, C.E.P.R. Discussion Papers.
- Jean-Paul Décamps, 2000. "Excessive Continuation and Dynamic Agency Costs of Debt," FMG Discussion Papers dp348, Financial Markets Group.
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
- L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
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