Advanced Search
MyIDEAS: Login

Leveraged Investments and Agency Conflicts When Prices Are Mean Reverting

Contents:

Author Info

Abstract

We analyse the effect of differing uncertainty assumptions on the costs of shareholder-bondholder conflicts arising from partially debt-financed investments. A partial equilibrium model, valid for a large class of diffusion processes, is developed and then applied to the specific cases of a geometric Brownian motion (GBM) and a mean-reverting (MR) process. This allows for the comparison of the two scenarios and contributes to the ongoing discussion on the effects of mean reversion on investment and financing behaviour. We find that agency costs are much lower under MR dynamics and, through the application of a novel agency cost decomposition, we show that for a high expected growth in future profits (high growth GBM) agency costs are driven mainly by suboptimal financing decisions, as opposed to suboptimal (default and investment) timing decisions. The situation is reversed for lower growth assumptions and for an increase in the speed of mean reversion. Our results on the components and drivers of agency costs are valuable to both policy makers and regulators alike.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.qfrc.uts.edu.au/research/research_papers/rp314.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 314.

as in new window
Length: 43
Date of creation: 01 Sep 2012
Date of revision:
Handle: RePEc:uts:rpaper:314

Contact details of provider:
Postal: PO Box 123, Broadway, NSW 2007, Australia
Phone: +61 2 9514 7777
Fax: +61 2 9514 7711
Web page: http://www.qfrc.uts.edu.au/
More information through EDIRC

Related research

Keywords: investment; real option; mean reversion; agency conflicts;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Kristoffer Glover & Gerhard Hambusch, 2013. "The Trade-off Theory Revisited: On the Effect of Operating Leverage," Research Paper Series 329, Quantitative Finance Research Centre, University of Technology, Sydney.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:uts:rpaper:314. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Duncan Ford).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.