THE UNDERINVESTMENT PROBLEM, BOND COVENANTS AND INSURANCE
James R. Garven and
Richard D. Macminn
Risk and Insurance from EconWPA
This article complements the earlier work by Mayers and Smith (1987) and Schnabel and Roumi (1989) which showed that a property insurance contract could be used to bond subsequent corporate investment decisions. Although these models suggest one possible approach to solving the underinvestment problem, neither model explicitly specifies the economic mechanism(s) required to guarantee that current shareholders receive the maximum possible benefits from solving this problem. We propose a financing-constrained model that not only eliminates underinvestment but also ensures that current shareholders capture the entire agency cost (net of loading) as an increase in value.
Keywords: corporate risk management; underinvestment; agency cost; bonding (search for similar items in EconPapers)
Note: Postscript (ASCII) UNDERINVS.ABS
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpri:9407007
Access Statistics for this paper
More papers in Risk and Insurance from EconWPA
Series data maintained by EconWPA ().