Investment timing, liquidity, and agency costs of debt

Stefan Hirth and Marliese Uhrig-Homburg

Journal of Corporate Finance, 2010, vol. 16, issue 2, 243-258

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)
Date: 2010
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Citations: View citations in EconPapers (22)

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Working Paper: Investment Timing, Liquidity, and Agency Costs of Debt (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:16:y:2010:i:2:p:243-258

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