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Dynamic investment and capital structure under manager-shareholder conflict

  • Shibata, Takashi
  • Nishihara, Michi

This paper investigates the interactions between the investment and financing decisions of a firm under manager-shareholder conflicts arising from asymmetric information. In particular, we extend the manager-shareholder conflict problem in a real options model by incorporating debt financing. We show that manager-shareholder conflicts over investment policy increase not only the investment and default triggers but also coupon payments, which lead to a decrease in the equity value. Moreover, given the presence of manager-shareholder conflicts, debt financing increases investment and decreases total social welfare. As a result, there is a trade-off between the efficiency of investment and total social welfare with debt financing. These results fit well with the findings of previous empirical work in this area.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 34 (2010)
Issue (Month): 2 (February)
Pages: 158-178

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Handle: RePEc:eee:dyncon:v:34:y:2010:i:2:p:158-178
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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