Excessive continuation and Dynamic Agency Costs of Debt

Antoine Faure-Grimaud and Décamps, Jean Paul
Authors registered in the RePEc Author Service: Jean-Paul Décamps

No 2504, CEPR Discussion Papers from Centre for Economic Policy Research

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. Equity holders' decisions exhibit excessive continuation and reduce the firm's value. Using a compound exchange option approach, we characterize 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.

Keywords: Debt; Dynamic agency costs; Excessive continuation (search for similar items in EconPapers)
JEL-codes: G13 G30 L10 (search for similar items in EconPapers)
Date: 2000-07
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Related works:
Journal Article: Excessive continuation and dynamic agency costs of debt (2002)
Working Paper: Excessive Continuation and Dynamic Agency Costs of Debt (2000)
Working Paper: Excessive Continuation and Dynamic Agency Costs of Debt (2000)
Working Paper: Excessive Continuation and Dynamic Agency Costs of Debt (2000)
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