Investment Timing, Liquidity, and Agency Costs of Debt

Stefan Hirth and Marliese Uhrig-Homburg
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Marliese Uhrig-Homburg: Chair of Financial Engineering and Derivatives, Postal: Universität Karlsruhe (TH), Germany

No F-2009-04, Finance Research Group Working Papers from University of Aarhus, Aarhus School of Business, Department of Business Studies

Abstract: This paper examines the effect of debt and liquidity on corporate investment in a continuous- time framework. We show that stockholder-bondholder agency conflicts cause investment thresholds to be U-shaped in leverage and decreasing in liquidity. In the absence of tax effects, we derive the optimal level of liquid funds that eliminates agency costs by implementing the first-best investment policy for a given capital structure. In a second step we generalize the framework by introducing a tax advantage of debt, and we show that an interior solution for liquidity and capital structure optimally trades off tax benefits and agency costs of debt

Keywords: investment timing; liquidity; agency costs of debt; capital structure; real options (search for similar items in EconPapers)
Pages: 48 pages
Date: 2009-05-05
New Economics Papers: this item is included in nep-bec and nep-cfn
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Citations: View citations in EconPapers (4)

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Journal Article: Investment timing, liquidity, and agency costs of debt (2010)
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