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Agency and Optimal Investment Dynamics

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Author Info
Peter M. DeMarzo
Michael J. Fishman
Abstract

Agency problems limit firms' access to capital markets, curbing investment. Firms and investors seek contractual ways to mitigate these problems. What are the implications for investment? We present a theory of a firm's investment dynamics in the presence of agency problems and optimal long-term financial contracts. We derive results relating firms' investment decisions, current and past cash flows, firm size, capital structure, and dividends. Among the results, optimal investment is increasing in current and past cash flow; and optimal investment is positively serially correlated over time (after controlling for investment opportunities). These results hold for a range of agency problems. (JEL G30, G31, G32, G35, D82, D86, D92) Copyright 2007, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/rfs/hhl004
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Article provided by Oxford University Press for Society for Financial Studies in its journal The Review of Financial Studies.

Volume (Year): 20 (2007)
Issue (Month): 1 (January)
Pages: 151-188
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Handle: RePEc:oup:rfinst:v:20:y:2007:i:1:p:151-188

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  1. Pagès, H., 2009. "Bank incentives and optimal CDOs," Documents de Travail 253, Banque de France. [Downloadable!]
  2. Rui Albuquerque & Neng Wang, 2007. "Agency Conflicts, Investment, and Asset Pricing," NBER Working Papers 13251, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Alex Edmans & Xavier Gabaix & Tomasz Sadzik & Yuliy Sannikov, 2009. "Dynamic Incentive Accounts," NBER Working Papers 15324, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Cristina Arellano & Yan Bai & Jing Zhang, 2007. "Contract Enforcement and Firms'd5 FinancingContract Enforcement and Firms'd5 Financing," Working Papers 573, Research Seminar in International Economics, University of Michigan. [Downloadable!]
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