IDEAS home Printed from
   My bibliography  Save this article

Conflict of Interest, Bond Rating and the Value Maximization Rule


  • Webb, David C


A number of authors have noted that when a firm issues risky debt in the absence of binding state-contingent contracts, the maximize-present-value rule becomes ambiguous. This paper shows that incomplete (asymmetric) information can explain why the firm will make value-maximizing decisions when there is a conflict of interest between shareholders and bondholders. The reputation effect of D. M. Kreps and R. Wilson (1982) and its implications for the pricing of securities is at the heart of this explanation. Copyright 1987 by The Review of Economic Studies Limited.

Suggested Citation

  • Webb, David C, 1987. "Conflict of Interest, Bond Rating and the Value Maximization Rule," Economica, London School of Economics and Political Science, vol. 54(216), pages 455-463, November.
  • Handle: RePEc:bla:econom:v:54:y:1987:i:216:p:455-63

    Download full text from publisher

    File URL:
    File Function: full text
    Download Restriction: Access to full text is restricted to JSTOR subscribers. See for details.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    1. Raphael, Steven & Winter-Ember, Rudolf, 2001. "Identifying the Effect of Unemployment on Crime," Journal of Law and Economics, University of Chicago Press, vol. 44(1), pages 259-283, April.
    2. Jonathan Gruber & Phillip Levine & Douglas Staiger, 1999. "Abortion Legalization and Child Living Circumstances: Who is the "Marginal Child"?," The Quarterly Journal of Economics, Oxford University Press, vol. 114(1), pages 263-291.
    3. Ziggy MacDonald, 2002. "Official Crime Statistics: Their Use and Interpretation," Economic Journal, Royal Economic Society, vol. 112(477), pages 85-106, February.
    4. Gary S. Becker, 1974. "Crime and Punishment: An Economic Approach," NBER Chapters,in: Essays in the Economics of Crime and Punishment, pages 1-54 National Bureau of Economic Research, Inc.
    5. Reilly, Barry & Witt, Robert, 1996. "Crime, Deterrence and Unemployment in England and Wales: An Empirical Analysis," Bulletin of Economic Research, Wiley Blackwell, vol. 48(2), pages 137-159, April.
    6. Ted Joyce, 2004. "Further Tests of Abortion and Crime," NBER Working Papers 10564, National Bureau of Economic Research, Inc.
    7. Ted Joyce, 2004. "Did Legalized Abortion Lower Crime?," Journal of Human Resources, University of Wisconsin Press, vol. 39(1).
    8. Steven D. Levitt, 1996. "The Effect of Prison Population Size on Crime Rates: Evidence from Prison Overcrowding Litigation," The Quarterly Journal of Economics, Oxford University Press, vol. 111(2), pages 319-351.
    9. John J. Donohue, III & Steven D. Levitt, 2004. "Further Evidence that Legalized Abortion Lowered Crime: A Reply to Joyce," Journal of Human Resources, University of Wisconsin Press, vol. 39(1).
    10. Reilly, Barry & Robert Witt, 1992. "Crime, deterrence and unemployment in England and Wales: an empirical analysis," Discussion Papers in Economics 12/92, Department of Economics, University of Sussex.
    11. Anindya Sen, 2002. "Does Increased Abortion Lead to Reduced Crime? Evaluating the Relationship between Crime, Abortion, and Fertility," Working Papers 02004, University of Waterloo, Department of Economics, revised Jan 2002.
    12. Mirko Draca & Stephen Machin, 2015. "Crime and Economic Incentives," Annual Review of Economics, Annual Reviews, vol. 7(1), pages 389-408, August.
    13. Sen Anindya, 2007. "Does Increased Abortion Lead to Lower Crime? Evaluating the Relationship between Crime, Abortion, and Fertility," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 7(1), pages 1-38, September.
    14. John J. Donohue & Steven D. Levitt, 2006. "Measurement Error, Legalized Abortion, and the Decline in Crime: A Response to Foote and Goetz (2005)," NBER Working Papers 11987, National Bureau of Economic Research, Inc.
    15. Entorf, Horst & Spengler, Hannes, 2000. "Socioeconomic and demographic factors of crime in Germany: Evidence from panel data of the German states," International Review of Law and Economics, Elsevier, vol. 20(1), pages 75-106, March.
    16. Carmichael, Fiona & Ward, Robert, 2001. "Male unemployment and crime in England and Wales," Economics Letters, Elsevier, vol. 73(1), pages 111-115, October.
    17. Eric D. Gould & Bruce A. Weinberg & David B. Mustard, 2002. "Crime Rates And Local Labor Market Opportunities In The United States: 1979-1997," The Review of Economics and Statistics, MIT Press, vol. 84(1), pages 45-61, February.
    18. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
    19. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
    20. Karin Edmark, 2005. "Unemployment and Crime: Is There a Connection?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(2), pages 353-373, June.
    Full references (including those not matched with items on IDEAS)

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:econom:v:54:y:1987:i:216:p:455-63. 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: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum). General contact details of provider: .

    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.

    We have no references for this item. You can help adding them by using 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.