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Agency Dynamics in Corporate Finance

Author

Listed:
  • Bart M. Lambrecht

    (Judge Business School, University of Cambridge, Cambridge CB2 1AG, United Kingdom
    Centre for Economic and Policy Research, London EC1V 0DX, United Kingdom)

  • Stewart C. Myers

    (Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02142
    National Bureau of Economic Research, Cambridge, Massachusetts 02138)

Abstract

We describe a framework for analyzing the dynamics of investment, borrowing, and payout decisions by public corporations. We assume that managers act entirely in their own long-run interests, subject to a governance constraint that limits their rents. Risk-neutral managers invest to maximize value but wait too long to disinvest. Efficient disinvestment can be forced by the right level of debt or by takeovers. Risk-averse managers underinvest; they do not waste free cash flow, because the governance constraint is binding. They smooth rents and consequently payout, so that changes in borrowing become a shock absorber for volatility of operating income. We obtain the Lintner model of payout if risk-averse managers have a utility function with habit formation. We show how to adapt the dynamic framework to analyze several other issues, including the effects of asymmetric information. We show that Lintner-style payout smoothing can also arise when risk-neutral managers are better informed than outsiders.

Suggested Citation

  • Bart M. Lambrecht & Stewart C. Myers, 2016. "Agency Dynamics in Corporate Finance," Annual Review of Financial Economics, Annual Reviews, vol. 8(1), pages 53-80, October.
  • Handle: RePEc:anr:refeco:v:8:y:2016:p:53-80
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    File URL: http://www.annualreviews.org/doi/10.1146/annurev-financial-121415-032937
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    Cited by:

    1. Abdul Halim, Asyraf, 2021. "Theory and evidence of the impacts of shariah debt screening on firm behaviour," MPRA Paper 109019, University Library of Munich, Germany.

    More about this item

    Keywords

    investment; payout; debt; takeover; agency;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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