IDEAS home Printed from https://ideas.repec.org/a/eee/dyncon/v34y2010i2p158-178.html
   My bibliography  Save this article

Dynamic investment and capital structure under manager-shareholder conflict

Author

Listed:
  • Shibata, Takashi
  • Nishihara, Michi

Abstract

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.

Suggested Citation

  • Shibata, Takashi & Nishihara, Michi, 2010. "Dynamic investment and capital structure under manager-shareholder conflict," Journal of Economic Dynamics and Control, Elsevier, vol. 34(2), pages 158-178, February.
  • Handle: RePEc:eee:dyncon:v:34:y:2010:i:2:p:158-178
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165-1889(09)00157-2
    Download Restriction: Full text for ScienceDirect subscribers only

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

    References listed on IDEAS

    as
    1. Hayne E. Leland, 1998. "Agency Costs, Risk Management, and Capital Structure," Journal of Finance, American Finance Association, vol. 53(4), pages 1213-1243, August.
    2. Grenadier, Steven R. & Wang, Neng, 2005. "Investment timing, agency, and information," Journal of Financial Economics, Elsevier, vol. 75(3), pages 493-533, March.
    3. Hugonnier, Julien & Morellec, Erwan, 2007. "Corporate control and real investment in incomplete markets," Journal of Economic Dynamics and Control, Elsevier, vol. 31(5), pages 1781-1800, May.
    4. Gaudet, Gerard & Lasserre, Pierre & Van Long, Ngo, 1998. "Real investment decisions under adjustment costs and asymmetric information," Journal of Economic Dynamics and Control, Elsevier, vol. 23(1), pages 71-95, September.
    5. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    6. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    7. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    8. Wong, Kit Pong, 2007. "The effect of uncertainty on investment timing in a real options model," Journal of Economic Dynamics and Control, Elsevier, vol. 31(7), pages 2152-2167, July.
    9. Leland, Hayne E, 1994. " Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 49(4), pages 1213-1252, September.
    10. Mauer, David C & Triantis, Alexander J, 1994. " Interactions of Corporate Financing and Investment Decisions: A Dynamic Framework," Journal of Finance, American Finance Association, vol. 49(4), pages 1253-1277, September.
    11. Gryglewicz, Sebastian & Huisman, Kuno J.M. & Kort, Peter M., 2008. "Finite project life and uncertainty effects on investment," Journal of Economic Dynamics and Control, Elsevier, vol. 32(7), pages 2191-2213, July.
    12. Jung, Kooyul & Yong-Cheol, Kim & Stulz, Rene M., 1996. "Timing, investment opportunities, managerial discretion, and the security issue decision," Journal of Financial Economics, Elsevier, vol. 42(2), pages 159-185, October.
    13. Sarkar, Sudipto, 2003. "The effect of mean reversion on investment under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 28(2), pages 377-396, November.
    14. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 707-727.
    15. Mauer, David C. & Sarkar, Sudipto, 2005. "Real options, agency conflicts, and optimal capital structure," Journal of Banking & Finance, Elsevier, vol. 29(6), pages 1405-1428, June.
    16. Korajczyk, Robert A & Lucas, Deborah J & McDonald, Robert L, 1991. "The Effect of Information Releases on the Pricing and Timing of Equity Issues," Review of Financial Studies, Society for Financial Studies, vol. 4(4), pages 685-708.
    17. Morellec, Erwan, 2001. "Asset liquidity, capital structure, and secured debt," Journal of Financial Economics, Elsevier, vol. 61(2), pages 173-206, August.
    18. Suresh Sundaresan & Neng Wang, 2007. "Investment under Uncertainty with Strategic Debt Service," American Economic Review, American Economic Association, vol. 97(2), pages 256-261, May.
    19. Shibata, Takashi, 2009. "Investment timing, asymmetric information, and audit structure: A real options framework," Journal of Economic Dynamics and Control, Elsevier, vol. 33(4), pages 903-921, April.
    20. Gutierrez, Oscar, 2007. "Devaluating projects and the investment-uncertainty relationship," Journal of Economic Dynamics and Control, Elsevier, vol. 31(12), pages 3881-3888, December.
    21. Brennan, Michael J & Schwartz, Eduardo S, 1984. " Optimal Financial Policy and Firm Valuation," Journal of Finance, American Finance Association, vol. 39(3), pages 593-607, July.
    22. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
    23. Erwan Morellec, 2004. "Can Managerial Discretion Explain Observed Leverage Ratios?," Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 257-294.
    24. David P. Baron & David Besanko, 1984. "Regulation, Asymmetric Information, and Auditing," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 447-470, Winter.
    25. Childs, Paul D. & Mauer, David C. & Ott, Steven H., 2005. "Interactions of corporate financing and investment decisions: The effects of agency conflicts," Journal of Financial Economics, Elsevier, vol. 76(3), pages 667-690, June.
    26. Parrino, Robert & Weisbach, Michael S., 1999. "Measuring investment distortions arising from stockholder-bondholder conflicts," Journal of Financial Economics, Elsevier, vol. 53(1), pages 3-42, July.
    Full references (including those not matched with items on IDEAS)

    Citations

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


    Cited by:

    1. Nishihara, Michi & Shibata, Takashi, 2013. "The effects of external financing costs on investment timing and sizing decisions," Journal of Banking & Finance, Elsevier, vol. 37(4), pages 1160-1175.
    2. repec:eee:corfin:v:48:y:2018:i:c:p:771-796 is not listed on IDEAS
    3. Shibata, Takashi & Nishihara, Michi, 2011. "Interactions between investment timing and management effort under asymmetric information: Costs and benefits of privatized firms," European Journal of Operational Research, Elsevier, vol. 215(3), pages 688-696, December.
    4. Shibata, Takashi & Nishihara, Michi, 2015. "Investment timing, debt structure, and financing constraints," European Journal of Operational Research, Elsevier, vol. 241(2), pages 513-526.
    5. Takahiro Watanabe, 2012. "Real Options and Signaling in Strategic Investment Games," KIER Working Papers 809, Kyoto University, Institute of Economic Research.
    6. Michi Nishihara & Takashi Sshibata, 2011. "Investment timing with fixed and proportional costs of external financing," Discussion Papers in Economics and Business 11-29, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
    7. Cardoso, David & Pereira, Paulo J., 2015. "A compensation scheme for optimal investment decisions," Finance Research Letters, Elsevier, vol. 14(C), pages 150-159.
    8. Michi Nishihara & Takashi Shibata, 2017. "Dynamic bankruptcy procedure with asymmetric information between insiders and outsiders," Discussion Papers in Economics and Business 17-18, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
    9. Shibata, Takashi & Yamazaki, Hiroshi, 2010. "Strategic investment timing under asymmetric access charge regulation in telecommunications," European Journal of Operational Research, Elsevier, vol. 207(3), pages 1689-1701, December.
    10. Shibata, Takashi & Tian, Yuan, 2012. "Debt reorganization strategies with complete verification under information asymmetry," International Review of Economics & Finance, Elsevier, vol. 22(1), pages 141-160.
    11. Shibata, Takashi & Nishihara, Michi, 2012. "Investment timing under debt issuance constraint," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 981-991.
    12. Nishihara, Michi & Shibata, Takashi, 2011. "The effects of costly exploration on optimal investment timing," Review of Financial Economics, Elsevier, vol. 20(3), pages 105-112, August.
    13. repec:eee:ejores:v:263:y:2017:i:3:p:1109-1122 is not listed on IDEAS
    14. Djembissi, Bertrand, 2011. "Excessive risk taking and the maturity structure of debt," Journal of Economic Dynamics and Control, Elsevier, vol. 35(10), pages 1800-1816, October.

    Corrections

    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:eee:dyncon:v:34:y:2010:i:2:p:158-178. 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: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/jedc .

    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 CitEc recognized a reference but did not link an item in RePEc 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 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.