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Excessive Continuation and Dynamic Agency Costs of Debt

  • Décamps, Jean-Paul
  • Faure-Grimaud, Antoine

This paper analyses the incentives of the equityholders of a leveraged company to shut it down in a continuous time, stochastic environment. Keeping the firm as an ongoing concern has an option value but equity and debt holders value it differently. Equityholders' decisions exhibit excessive continuation and reduce firm's value. Using a compounbd exchange option approach, we characterise the resulting agency costs of debt, derive the "price" of these costs and analyse their dynamics. We also show how agency costs can be reduced by the design of debt and the possibility of renegotiation.

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Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 99.

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Date of creation: 2000
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Publication status: Published in European Economic Review, vol.�46, Elsevier, 2002, p.�1623-1644.
Handle: RePEc:ide:wpaper:678
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  18. Oliver Hart & John Moore, 1988. "Property Rights and the Nature of the Firm," Working papers 495, Massachusetts Institute of Technology (MIT), Department of Economics.
  19. Carr, Peter P, 1988. " The Valuation of Sequential Exchange Opportunities," Journal of Finance, American Finance Association, vol. 43(5), pages 1235-56, December.
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