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Excessive continuation and dynamic agency costs of debt

Décamps, Jean-Paul and Faure-Grimaud, Antoine (2002) Excessive continuation and dynamic agency costs of debt. European Economic Review, 46 (9). 1623 - 1644. ISSN 0014-2921

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Identification Number: 10.1016/S0014-2921(02)00242-8

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.

Item Type: Article
Official URL: http://www.sciencedirect.com/science/journal/00142...
Additional Information: © 2002 Elsevier Science
Divisions: Financial Markets Group
STICERD
Subjects: H Social Sciences > HB Economic Theory
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: 02 Jul 2008 15:51
Last Modified: 03 Jan 2024 21:15
URI: http://eprints.lse.ac.uk/id/eprint/6355

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