Measuring the Agency Cost of Debt

Antonio S Mello and John E Parsons

Journal of Finance, 1992, vol. 47, issue 5, 1887-904

Abstract: The authors adapt a contingent claims model of the firm to reflect the incentive effects of the capital structure and, thereby, to measure the agency costs of debt. An underlying model of the firm and the stochastic features of its product market are analyzed and an optimal operating policy is chosen. The authors identify the change in operating policy created by leverage and value this change. The model determines the value of the firm and its associated liabilities incorporating the agency consequences of debt. Copyright 1992 by American Finance Association.

Date: 1992
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