Excessive continuation and dynamic agency costs of debt

Decamps, Jean-Paul and Faure-Grimaud, Antoine (2000) Excessive continuation and dynamic agency costs of debt. Financial Markets Group Discussion Papers (348). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

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 compound 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.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 2000 The Author(s)
Divisions:	Economics
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	G - Financial Economics > G3 - Corporate Finance and Governance > G30 - General G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing; Futures Pricing L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L10 - General
Date Deposited:	29 Jun 2023 10:15
Last Modified:	14 Sep 2024 04:33
URI:	http://eprints.lse.ac.uk/id/eprint/119106

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